4,500,000 Shares
We are selling 4,500,000 shares of our common stock. We have granted the underwriters an option to purchase up to 675,000 additional shares of common stock to cover over-allotments.
Our common stock is quoted on the Nasdaq National Market under the symbol FFIV. The last reported sale price of our common stock on the Nasdaq National Market on November 11, 2003 was $23.51 per share.
Investing in our common stock involves risks. See Risk Factors beginning on page S-6 of this prospectus supplement and page 2 of the accompanying prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Per Share | Total | |||||||
|
|
|||||||
Public Offering Price
|
$ | 23.2500 | $ | 104,625,000 | ||||
Underwriting Discount
|
$ | 1.1625 | $ | 5,231,250 | ||||
Proceeds to F5 Networks, Inc. (before
expenses)
|
$ | 22.0875 | $ | 99,393,750 |
The underwriters expect to deliver the shares to purchasers on or about November 17, 2003.
Sole Book-Runner
Citigroup | Lehman Brothers |
November 11, 2003
TABLE OF CONTENTS
Page | ||||
|
||||
Prospectus Supplement | ||||
Summary
|
S-1 | |||
Risk Factors
|
S-6 | |||
Forward-Looking Statements
|
S-13 | |||
Use of Proceeds
|
S-13 | |||
Price Range of Our Common Stock
|
S-14 | |||
Dividend Policy
|
S-14 | |||
Capitalization
|
S-15 | |||
Unaudited Pro Forma Condensed Combined
Consolidated Statements of Operations
|
S-16 | |||
Selected Consolidated Financial Data
|
S-18 | |||
Managements Discussion and Analysis of
Financial Condition and Results of Operations
|
S-20 | |||
Business
|
S-29 | |||
Management
|
S-41 | |||
Certain Relationships and Related Party
Transactions
|
S-44 | |||
Principal Stockholders
|
S-45 | |||
Underwriting
|
S-47 | |||
Legal Matters
|
S-49 | |||
Experts
|
S-49 | |||
Where You Can Find More Information
|
S-49 | |||
Incorporation by Reference
|
S-50 | |||
Index to Financial Statements
|
F-1 |
Page | ||||
|
||||
Prospectus | ||||
Risk Factors
|
2 | |||
Use of Proceeds
|
2 | |||
Ratio of Earnings to Fixed Charges
|
2 | |||
Description of Debt Securities
|
3 | |||
Description of Capital Stock
|
11 | |||
Description of Depositary Shares
|
13 | |||
Description of Warrants
|
16 | |||
Description of Purchase Contracts and Units
|
18 | |||
Plan of Distribution
|
19 | |||
Legal Matters
|
20 | |||
Experts
|
20 | |||
Incorporation by Reference
|
20 | |||
Where You Can Find More Information
|
21 |
This document is in two parts. The first part is this prospectus supplement, which describes the specific terms of this offering of common stock and also adds to and updates information contained in the accompanying prospectus and the documents incorporated by reference in this prospectus supplement and the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information, some of which does not apply to our common stock. Generally, when we refer to the
i
You should rely only on the information contained or incorporated by reference in this prospectus supplement and the accompanying prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date on the front of this prospectus supplement or the accompanying prospectus, as applicable.
Unless specifically stated in this prospectus supplement, the information contained herein assumes that the underwriters will not exercise their over-allotment option and that no other person will exercise any other outstanding options or warrants.
F5, F5 Networks, BIG-IP, 3-DNS, iControl, iRules and FirePass are our trademarks or registered trademarks. Oracle Financials, BEA Weblogic and Siebel Salesforce Automation are trademarks of Oracle Corporation, BEA Systems, Inc. and Siebel Systems, Inc., respectively.
ii
SUMMARY
This summary highlights selected information contained elsewhere or incorporated by reference in this prospectus supplement and the accompanying prospectus. This summary may not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus supplement and the accompanying prospectus carefully, including Risk Factors and the financial statements included in and incorporated by reference into this prospectus supplement, before making an investment decision. Unless the context otherwise requires, in this prospectus supplement the terms F5 Networks, we, us and our refer to F5 Networks, Inc. and its subsidiaries. Our fiscal year ends on September 30 and fiscal years are referred to by the calendar year in which they end. For example, fiscal year 2003 refers to the fiscal year ended September 30, 2003.
F5 Networks, Inc.
We develop, manufacture and sell products and services to help companies efficiently and securely manage their Internet traffic, as well as the access and use of their intranet-based software applications. Our application traffic management products, including the BIG-IP Controller, 3-DNS Controller and BIG-IP Link Controller, help manage Internet traffic to servers and network devices in a way that maximizes the availability, scalability and throughput of those network components and the applications that run on them. Our recently acquired FirePass family of network server appliances provides secure user access to corporate networks and individual applications through any standard Web browser. Our unique iControl architecture enables our products to communicate with one another in the network and ensure optimal throughput of traffic, and also allows them to be integrated with third party products, including enterprise applications. This facilitates automation of repetitive processes and allows the customer to optimize applications on their networks. As components of an integrated solution, our products address many elements required for successful Internet and intranet business applications, including high availability, high performance, intelligent load balancing, streamlined manageability, remote access to corporate networks, and network and application security. Our solution for application traffic management and security is software-based, which differentiates us from our competitors whose solutions are largely hardware-based. We believe this differentiation enables us to offer our customers greater flexibility, cost-effectiveness and adaptability in response to todays rapidly changing environment. In fiscal year 2003 our net revenue was $115.9 million and our net income was $4.1 million.
Enterprise customers (Fortune 1000 or Business Week Global 1000 companies) in financial services, manufacturing, transportation and mobile telecommunications make up the largest percentage of our customer base. We market and sell our products primarily through indirect sales channels in North America, Europe and the Asia Pacific region, and to some direct customer accounts in North America. We have subsidiaries or branch offices in Australia, Canada, China, France, Germany, Hong Kong, Japan, The Netherlands, Singapore, South Korea, Spain, Taiwan, Thailand and the United Kingdom.
In July 2003, we acquired substantially all of the assets and assumed certain liabilities of uRoam, Inc., or uRoam. uRoams family of FirePass servers is a comprehensive remote access product set that enables users to access applications in a secure fashion, using technology based on the Secure Sockets Layer, or SSL, standard. We believe FirePass provides a security solution that is easier to manage and use, and is more secure, than existing solutions, allowing customers to realize significant cost savings for secure remote access to any application. The acquisition of substantially all of the assets of uRoam will allow us to quickly enter the SSL Virtual Private Network, or VPN, market, broaden our customer base and augment our existing product line.
S-1
Our Strategy
Our objective is to be the leading provider of secure application traffic management solutions designed to enhance and optimize server availability, security and performance. Key components of our strategy include:
Offering a complete application security solution and product set. We plan to utilize our core technologies from our BIG-IP and FirePass products to deliver standalone and integrated systems that protect applications from hostile and inadvertent threats, including user-to-system application security and system-to-system application security problems.
Increasing the addressable market for our products. We intend to target logical extensions of our traditional traffic management market, including the areas of blade server software, mobile Internet Protocol, or IP, infrastructure, Web services infrastructure and utility computing and data center virtualization infrastructure. In addition, we plan to enter adjacent markets, such as the application security market, with our first product offering being an SSL VPN solution.
Investing in technology to continue to meet customer needs. We plan to continue to invest in research and development to provide our customers with complete secure application traffic management and secure remote access solutions. Our software-based platforms are designed to expand the features and functionalities of our products, as well as enabling us to develop additional products that address the needs of our customers. We also plan to deliver specialized software modules that will allow our customers to purchase software for our platforms as upgrades with specific features based on specific requirements.
Enhancing the existing channel model. We plan to expand our indirect sales channels through leading industry resellers, original equipment manufacturers, or OEMs, systems integrators, Internet service providers and other channel partners. Also, we are leveraging our existing channels by delivering application security products, including FirePass SSL VPNs, making these channels more productive.
Continuing to build and expand relationships with strategic iControl partners. We plan to capitalize on our strategic relationships with enterprise software vendors who have created interfaces to our products through our iControl application programming interface, or API. These vendors provide us significant leverage in the selling process, because they recommend our products to their customers.
Enhancing our brand. We plan to continue building brand awareness that positions us as one of the leading providers of secure application traffic management solutions. Our goal is for the F5 brand to be synonymous with superior performance, high-quality customer service and ease of use.
Corporate Information
We were incorporated on February 26, 1996 in the State of Washington. Our headquarters is in Seattle, Washington and our mailing address is 401 Elliott Avenue West, Seattle, Washington 98119. The telephone number at our executive offices is (206) 272-5555. Our website address is www.f5.com. Information appearing on, or available through, our website does not constitute a part of this prospectus supplement.
S-2
Recent Developments
On October 29, 2003, we announced that our total net revenues for the quarter ended September 30, 2003 were $31.6 million, an increase of 8.2% from $29.2 million for the quarter ended June 30, 2003 and an increase of 16.6% from $27.1 million for the quarter ended September 30, 2002. Net income for the quarter ended September 30, 2003 was $1.4 million, or $0.05 per share, compared to net income of $1.4 million, or $0.05 per share, for the quarter ended June 30, 2003 and a net loss of $423,000, or $0.02 per share, for the quarter ended September 30, 2002. In addition, as of September 30, 2003, we had $79.0 million of cash, cash equivalents and investments. Cash provided by operating activities was $5.6 million for the quarter ended September 30, 2003.
S-3
The Offering
The number of shares of our common stock to be
outstanding immediately after this offering is based on the
number of shares outstanding as of November 10, 2003, and
excludes:
S-4
Common stock offered by F5 Networks,
Inc.
4,500,000 shares
Common stock outstanding after this offering
32,228,657 shares
Use of proceeds after expenses
The net proceeds to us from this offering will be
approximately $98.9 million. We expect to use the net
proceeds for working capital and other general corporate
purposes, which may include capital expenditures, development of
new products and technologies or the acquisition of or
investment in complementary products, technologies or
businesses. However, we are not currently discussing any such
acquisitions or investments and currently have no understanding
or agreement related to any transaction.
Nasdaq National Market Symbol
FFIV
7,470,408 shares of common stock subject to
outstanding options granted under our stock option plans at a
weighted average exercise price of $18.33 per share;
1,190,034 shares of common stock reserved
for future stock option grants and restricted stock awards under
our stock option plans; and
217,782 shares of common stock available for
issuance under our employee stock purchase plan.
Table of Contents
Summary Consolidated Financial Data
The following summary presents our consolidated
financial data as of and for each of the years in the five year
period ended September 30, 2003. This summary information
should be read in conjunction with, and is qualified in its
entirety by reference to, Selected Consolidated Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
audited and unaudited historical consolidated financial
statements, including introductory paragraphs and related notes
to these financial statements, included in, and incorporated by
reference into, this prospectus supplement.
S-5
Years Ended September 30,
2003
2002
2001
2000
1999
(in thousands, except per share data)
$
115,895
$
108,266
$
107,367
$
108,645
$
27,825
88,990
77,787
61,862
76,074
20,625
4,189
(9,541
)
(28,716
)
12,852
(4,878
)
4,087
(8,610
)
(30,790
)
13,650
(4,344
)
0.15
(0.34
)
(1.36
)
0.65
(0.42
)
26,453
25,323
22,644
21,137
10,238
0.14
(0.34
)
(1.36
)
0.59
(0.42
)
28,220
25,323
22,644
23,066
10,238
$
44,878
$
80,333
$
69,783
$
53,199
$
24,797
6,000
6,000
6,000
6,000
3,013
34,132
1,346
148,173
126,289
124,663
122,420
42,846
1,735
1,315
1,167
238
110,429
93,685
96,488
87,685
31,973
(1)
Restricted cash represents an escrow account
established in connection with a lease agreement for our
corporate headquarters. Under the terms of the lease, a
$6.0 million certificate of deposit is required through
November 2012, unless the lease is terminated prior to that date.
Table of Contents
RISK FACTORS
You should carefully consider the risks described below before making an investment decision. You should also refer to the other information in this prospectus supplement and the accompanying prospectus, including our financial statements and the related notes included and incorporated by reference into this prospectus supplement. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. In that event the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.
Risks Related to our Business
Our success depends on sales and continued innovation of our BIG-IP product line. |
For the fiscal year ended September 30, 2003, we derived 82.8% of our product revenues from sales of our BIG-IP product line. We expect to derive a significant portion of our net revenues from sales of our BIG-IP products in the future. Implementation of our strategy depends upon BIG-IP being able to solve critical network availability and performance problems of our customers. If BIG-IP is unable to solve these problems for our customers, or if we are unable to sustain the high levels of innovation in BIG-IPs product feature set needed to maintain leadership in what will continue to be a competitive market environment, our business and results of operations will be harmed.
Our success depends on our timely development of new products and features and proper management of the timing of the life cycle of our products. |
We expect the secure application traffic management market to be characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. Our continued success depends on our ability to identify and develop new products and new features for our existing products to meet the demands of these changes, and for those products and features to be accepted by our existing and target customers. If we are unable to identify, develop and deploy new products and new product features on a timely basis, or if those products do not gain market acceptance, our business and results of operations may be harmed.
The current life cycle of our products is typically 12 to 24 months. The introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction, and may cause customers to defer purchasing our existing products in anticipation of the new products. This could harm our operating results by decreasing sales, increasing our inventory levels of older products and exposing us to greater risk of product obsolescence. We have also experienced, and may in the future experience, delays in developing and releasing new products and product enhancements. This has led to, and may in the future lead to, delayed sales, increased expenses and lower quarterly revenue than anticipated. Also, in the development of our products, we have experienced delays in the prototyping of our products, which in turn has led to delays in product introductions. In addition, complexity and difficulties in managing product transitions at the end-of-life stage of a product can create excess inventory of components associated with the outgoing product that can lead to increased expenses. Any or all of the above problems could materially harm our business and operating results.
We may not be able to compete effectively in the emerging secure application traffic management market. |
The markets we serve are new, rapidly evolving and highly competitive, and we expect competition to persist and intensify in the future. Our principal competitors in the secure application traffic management market include Cisco Systems, Inc., Nortel Networks Corporation, Foundry Networks, Inc., NetScaler, Inc., Radware Ltd. and NetScreen Technologies, Inc. We expect to continue to face additional
S-6
Our quarterly and annual operating results are volatile and may cause our stock price to fluctuate. |
Our quarterly and annual operating results have varied significantly in the past and will vary significantly in the future, which makes it difficult for us to predict our future operating results. In particular, we anticipate that the size of customer orders may increase as we continue to focus on larger business accounts. A delay in the recognition of revenue, even from just one account, may have a significant negative impact on our results of operations for a given period. In the past, a majority of our sales have been realized near the end of a quarter. Accordingly, a delay in an anticipated sale past the end of a particular quarter may negatively impact our results of operations for that quarter, or in some cases, that year. Furthermore, we base our decisions regarding our operating expenses on anticipated revenue trends and our expense levels are relatively fixed. Consequently, if revenue levels fall below our expectations, our net income will decrease because only a small portion of our operating expenses vary with our revenues.
We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicators of future performance. Our operating results may be below the expectations of securities analysts and investors in future quarters or years. Our failure to meet these expectations will likely harm the market price of our common stock.
The average selling price of our products may decrease and our costs may increase, which may negatively impact gross profits. |
We anticipate that the average selling prices of our products will decrease in the future in response to competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors or other factors. Therefore, in order to maintain our gross profits, we must develop and introduce new products and product enhancements on a timely basis and continually reduce our product costs. Our failure to do so will cause our net revenue and gross profits to decline, which will harm our business and results of operations. In addition, we may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices.
It is difficult to predict our future operating results because we have an unpredictable sales cycle. |
Our products have a lengthy sales cycle, which is difficult to predict. Historically, our sales cycle has ranged from approximately two to three months and has tended to lengthen as we have increasingly focused our sales efforts on the enterprise market. Also, as our distribution strategy has evolved into more of a channel model, utilizing value-added resellers, distributors and systems integrators, the level of variability in the length of sales cycle across transactions has increased and made it more difficult to predict the timing of many of our sales transactions. Sales of our BIG-IP and 3-DNS products require us to educate potential customers in their use and benefits. Sales of our products are subject to delays from the lengthy internal budgeting, approval and competitive evaluation processes that large corporations and governmental entities may require. For example, customers frequently begin by evaluating our products on a limited basis and devote time and resources to testing our products before they decide whether or not to purchase. Customers may also defer orders as a result of anticipated releases of new products or enhancements by our competitors or us. As a result, our products have an unpredictable sales cycle that contributes to the uncertainty of our future operating results.
S-7
Our business may be harmed if our contract manufacturer is not able to provide us with adequate supplies of our products or if this single source of hardware assembly is lost or impaired. |
We rely on a third party contract manufacturer to assemble our products. We outsource the manufacturing of our hardware platforms to this contract manufacturer who assembles these hardware platforms to our specifications. We have experienced minor delays in shipments from contract manufacturers in the past. However, if we experience major delays in the future or other problems, such as inferior quality and insufficient quantity of product, any one or a combination of these factors may harm our business and results of operations. The inability of our contract manufacturer to provide us with adequate supplies of our products or the loss of our contract manufacturer may cause a delay in our ability to fulfill orders while we obtain a replacement manufacturer and may harm our business and results of operations. In particular, because we subcontract substantially all of our manufacturing to a single contract manufacturer, with whom we do not have a long-term contract, any termination, loss or impairment in our arrangement with this single source of hardware assembly, or any impairment of their facilities or operations, would harm our business, financial condition and results of operation.
If the demand for our products grows, we will need to increase our raw material and component purchases, contract manufacturing capacity and internal test and quality functions. Any disruptions in product flow may limit our revenue, may harm our competitive position and may result in additional costs or cancellation of orders by our customers.
Our business could suffer if there are any interruptions or delays in the supply of hardware components from our third-party sources. |
We currently purchase several hardware components used in the assembly of our products from a number of single or limited sources. Lead times for these components vary significantly. Any interruption or delay in the supply of any of these hardware components, or the inability to procure a similar component from alternate sources at acceptable prices within a reasonable time, may delay assembly and sales of our products and, hence, our revenues, and may harm our business and results of operations.
We may not adequately protect our intellectual property and our products may infringe on the intellectual property rights of third parties. |
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure of confidential and proprietary information to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. We are actively involved in disputes and licensing discussions with others regarding their claimed proprietary rights and cannot assure you that we will always successfully defend ourselves against such claims. If we are found to infringe the proprietary rights of others, or if we otherwise settle such claims, we could be compelled to pay damages or royalties and either obtain a license to those intellectual property rights or alter our products so that they no longer infringe upon such proprietary rights. Any license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical. In addition, we have initiated, and may in the future initiate, claims or litigation against third parties for infringement of our proprietary rights, including infringement of a patent we hold on our cookie persistence technology, to determine the scope and validity of our proprietary rights or those of our competitors. Any of these claims, whether claims that we are infringing the proprietary rights of others, or vice versa, with or without merit, may be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to cease using infringing technology, develop non-infringing technology or enter into royalty or licensing agreements. Further, our
S-8
Future changes in financial accounting standards or our revenue recognition policies may cause adverse unexpected revenue fluctuations and affect our reported results of operations. |
A change in accounting policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New pronouncements and varying interpretations of pronouncements have occurred with frequency and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
In particular, if we are required to record stock option grants as compensation expense on our income statement, our profitability may be reduced significantly. The current methodology for expensing such stock options is based on, among other things, the historical volatility of the underlying stock. Our stock price has been historically volatile. Therefore, the adoption of an accounting standard requiring companies to expense stock options would negatively impact our profitability and may adversely impact our stock price. In addition, the adoption of such a standard could limit our ability to continue to use stock options as an incentive and retention tool, which could, in turn, hurt our ability to recruit employees and retain existing employees.
Similarly, while we believe our current revenue recognition policies and practices are consistent with applicable accounting standards, current revenue recognition accounting standards, and accounting guidance with respect to such standards, are subject to change. Such changes could lead to unanticipated changes in our current revenue accounting practices, and such changes could significantly reduce our future revenues and earnings, which would likely have a material adverse effect on the price of our common stock.
We may not be able to sustain or develop new distribution relationships and a reduction or delay in sales to a significant distribution partner could hurt our business. |
Our sales strategy requires that we establish and maintain multiple distribution channels in the United States and internationally through leading industry resellers, original equipment manufacturers, or OEMs, systems integrators, Internet service providers and other channel partners. We have a limited number of agreements with companies in these channels, and we may not be able to increase our number of distribution relationships or maintain our existing relationships. If we are unable to establish and maintain our indirect sales channels, our business and results of operations will be harmed. In addition, one distributor of our products accounted for 12.6% of our net revenue for the fiscal year ended September 30, 2003. During the fiscal year ended September 30, 2002, no single reseller or customer accounted for more than 10% of our net revenue. A substantial reduction or delay in sales of our products to this or any other key distribution partner could harm our business, operating results and financial condition.
Undetected software errors may harm our business and results of operations. |
Software products frequently contain undetected errors when first introduced or as new versions are released. We have experienced these errors in the past in connection with new products and product upgrades. We expect that these errors will be found from time to time in new or enhanced products after commencement of commercial shipments. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. We may also be subject to liability claims for damages related to product errors. While we carry insurance policies covering this type of liability, these policies may not provide sufficient protection should a claim be asserted. A material product liability claim may harm our business and results of operations.
S-9
Our products must successfully operate with products from other vendors. As a result, when problems occur in a network, it may be difficult to identify the source of the problem. The occurrence of software errors, whether caused by our products or another vendors products, may result in the delay or loss of market acceptance of our products. The occurrence of any of these problems may harm our business and results of operations.
Our expansion into international markets may not succeed. |
We intend to continue expanding into international markets. International sales represented 34.9% of our net revenues for the fiscal year ended September 30, 2003, 32.2% of our net revenues for the fiscal year ended September 30, 2002 and 33.3% of our net revenues for the fiscal year ended September 30, 2001. We have engaged sales personnel throughout Europe and the Asia Pacific region. Our continued growth will require further expansion of our international operations in the European, Asia Pacific and other markets. If we are unable to expand our international operations successfully and in a timely manner, our business and results of operations may be harmed. Such expansion may be more difficult or take longer than we anticipate, and we may not be able to successfully market, sell, deliver and support our products internationally.
Our operating results are exposed to risks associated with international commerce. |
As our international sales increase, our operating results become more exposed to international operating risks. These risks include risks related to potential recessions in economies outside the United States, foreign currency exchange rates, managing foreign sales offices, regulatory, political, or economic conditions in specific countries, military conflict or terrorist activities, changes in laws and tariffs, inadequate protection of intellectual property rights in foreign countries, foreign regulatory requirements, and natural disasters. All of these factors could have a material adverse effect on our business. In particular, in fiscal year 2003, we derived 13.8% of our total revenue from the Japanese market and this revenue is dependent on a number of factors outside our control, including the viability and success of our resellers and the strength of the Japanese economy, which has been weak in recent years.
Acquisitions, including our recent acquisition of substantially all of the assets of uRoam, Inc., present many risks and we may not realize the financial and strategic goals that are contemplated at the time of the transaction. |
With respect to our July 2003 acquisition of substantially all of the assets of uRoam, Inc., as well as any other future acquisitions we may undertake, we may find that the acquired assets do not further our business strategy as expected, or that we paid more than what the assets are later worth, or that economic conditions change, all of which may generate future impairment charges. There may be difficulty integrating the operations and personnel of the acquired business, and we may have difficulty retaining the key personnel of the acquired business. In the case of the assets acquired from uRoam, Inc., because it was based in Northern California and because the employees we hired in connection with the acquisition were not relocated to Seattle, the above-mentioned integration and personnel retention issues represent a particular risk to us. We may have difficulty in incorporating the acquired technologies or products with our existing product lines. Our ongoing business and managements attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically and culturally diverse locations. We may have difficulty maintaining uniform standards, controls, procedures and policies across locations. We may experience significant problems or liabilities associated with the product quality, technology and other matters.
Our inability to successfully operate and integrate newly-acquired businesses appropriately, effectively and in a timely manner, or to retain key personnel of uRoam, Inc. or any other acquired business, could have a material adverse effect on our ability to take advantage of further growth in demand for integrated traffic management and security solutions and other advances in technology, as well as on our revenues, gross margins and expenses.
S-10
Our success depends on our key personnel and our ability to attract, train and retain qualified marketing and sales, professional services and customer support personnel. |
Our success depends to a significant degree upon the continued contributions of our key management, product development, sales, marketing and finance personnel, many of which may be difficult to replace. The complexity of our secure application traffic management products and their integration into existing networks and ongoing support, as well as the sophistication of our sales and marketing effort, requires us to retain highly trained professional services, customer support and sales personnel. In spite of the economic downturn, competition for qualified professional services, customer support and sales personnel in our industry is intense because of the limited number of people available with the necessary technical skills and understanding of our products. Our ability to retain and hire these personnel may be adversely affected by volatility or reductions in the price of our common stock, since these employees are generally granted stock options. The loss of services of any of our key personnel, the inability to retain and attract qualified personnel in the future or delays in hiring qualified personnel, may harm our business and results of operations.
We face litigation risks. |
We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We believe that we have defenses in the lawsuits pending against us and we are vigorously contesting these allegations. Responding to the allegations has been, and probably will be, expensive and time-consuming for us. An unfavorable resolution of the lawsuits could adversely affect our business, results of operations, or financial condition.
Anti-takeover provisions could make it more difficult for a third party to acquire us. |
Our Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of our company without further action by our stockholders and may adversely affect the voting and other rights of the holders of common stock. Further, certain provisions of our bylaws, including a provision limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of our company, which could have an adverse effect on the market price of our common stock. In addition, our articles of incorporation provide for a staggered board, which may make it more difficult for a third party to gain control of our board of directors. Similarly, state anti-takeover laws in the State of Washington related to corporate takeovers may prevent or delay a change of control of our company.
Risks Related to the Offering
Our stock price may fluctuate significantly. |
The market price of our common stock has been, and we expect will continue to be, subject to significant fluctuations. Factors affecting our market price include:
| quarterly variations in our results of operations; | |
| failure to meet earnings estimates; | |
| changes in earnings estimates or buy/sell recommendations by analysts; | |
| the operating and stock price performance of comparable companies; |
S-11
| developments in the financial markets; | |
| the announcement of new products or product enhancements or business results by us or our competitors; and | |
| general market conditions or market conditions specific to the industries in which we operate. |
Recent stock prices for many technology companies have fluctuated in ways unrelated or disproportionate to the operating performance of the companies. Those fluctuations and general economic, political and market conditions, such as recessions or international currency fluctuations, may adversely affect the market price of our common stock.
Future sales of our common stock may cause our stock price to decline.
All of our outstanding shares of common stock, other than shares owned by affiliates, are freely tradable without restriction or further registration. Affiliates must comply with the volume and other requirements of Rule 144, except for the holding period requirements, in the sale of their shares. Sales of substantial amounts of common stock by our stockholders, including shares issued upon the exercise of outstanding options and warrants, or even the potential for such sales, may have a depressive effect on the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities.
We may issue additional shares and dilute your ownership percentage. |
Some events over which you have no control could result in the issuance of additional shares of our common stock, which would dilute the ownership percentage of holders of our common stock. We may issue additional shares of common stock or preferred stock:
| to raise additional capital or finance acquisitions; | |
| upon the exercise or conversion of outstanding options; or | |
| in lieu of any cash dividend payments we may make. |
In addition, the rights of holders of our common stock may be adversely affected by the rights of holders of any preferred stock that may be issued in the future that would be senior to the rights of the holders of our common stock.
S-12
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus, including the documents incorporated herein by reference, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. In some cases, you can identify forward-looking statements by terminology such as anticipate, believe, continue, could, estimate, expect, intend, may, might, plan, potential, predict, should or will or the negative of those terms or comparable terminology. Forward-looking statements involve risks and uncertainties, such as our objectives, forecasts, expectations and intentions. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all forward-looking statements in this prospectus supplement, in the accompanying prospectus, in the documents incorporated herein by reference and in any other public statements we make may turn out to be wrong. Forward-looking statements reflect our current expectations and are inherently uncertain. Inaccurate assumptions we might make and known or unknown risks and uncertainties can affect the accuracy of our forward-looking statements. Consequently, no forward-looking statement can be guaranteed and our actual results may differ materially. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
USE OF PROCEEDS
The net proceeds from the sale of the 4,500,000 shares of common stock that we are offering will be approximately $98.9 million. If the underwriters fully exercise the over-allotment option, the net proceeds from the sale of shares we are offering will be approximately $113.8 million. Net proceeds are the proceeds we expect to receive after paying the underwriting discount and other expenses of the offering. We expect to use the net proceeds for working capital and other general corporate purposes, which may include capital expenditures, development of new products and technologies or the acquisition of or investment in complementary products, technologies or businesses. However, we are not currently discussing any such acquisitions or investments and currently have no understanding or agreement related to any transaction.
Pending these uses, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities. We do not currently have a specific plan with respect to the use of the net proceeds of this offering. As a result, our management will have broad discretion with respect to their use, and investors will be relying on the judgment of our management regarding the application of these proceeds. In addition, any investments, capital expenditures, cash acquisitions or other use of proceeds may not produce the anticipated results.
S-13
PRICE RANGE OF OUR COMMON STOCK
Our common stock is traded on the Nasdaq National
Market under the symbol FFIV. The following table
sets forth the high and low sales prices of our common stock as
reported on the Nasdaq National Market.
High
Low
$
28.73
$
7.00
$
27.23
$
17.78
$
23.86
$
7.31
$
15.48
$
7.13
$
15.15
$
6.40
$
15.50
$
10.70
$
18.86
$
12.15
$
21.85
$
16.20
$
27.45
$
19.25
The last reported sales price of our common stock on the Nasdaq National Market on November 11, 2003 was $23.51.
As of November 10, 2003, there were 130 holders of record of our common stock. As many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial holders of our common stock represented by these record holders.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. For the foreseeable future, we intend to retain earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock.
S-14
CAPITALIZATION
As of September 30, 2003, we did not have any long-term indebtedness. The following table shows:
| our cash, cash equivalents and short-term investments and total shareholders equity as of September 30, 2003; and | |
| our cash, cash equivalents and short-term investments and total shareholders equity as of September 30, 2003, adjusted to reflect the completion of the offering of 4,500,000 shares of our common stock at the public offering price of $23.25 per share and the use of the net proceeds as described under Use of Proceeds. |
September 30, 2003 | |||||||||
|
|||||||||
Actual | As Adjusted | ||||||||
|
|
||||||||
(in thousands, except for | |||||||||
share amounts) | |||||||||
Cash, cash equivalents and short-term investments
|
$ | 44,878 | $ | 143,782 | |||||
Restricted cash(1)
|
6,000 | 6,000 | |||||||
Shareholders equity:
|
|||||||||
Preferred stock, no par value; 10,000,000 shares
authorized, no shares outstanding
|
| | |||||||
Common stock, no par value; 100,000,000 shares
authorized, 27,402,592 shares outstanding actual;
31,902,592 shares outstanding as adjusted(2)
|
141,709 | 240,613 | |||||||
Unearned compensation
|
(10 | ) | (10 | ) | |||||
Accumulated other comprehensive income
|
195 | 195 | |||||||
Accumulated deficit
|
(31,465 | ) | (31,465 | ) | |||||
|
|
||||||||
Total shareholders equity
|
$ | 110,429 | $ | 209,333 | |||||
|
|
(1) | Restricted cash represents an escrow account established in connection with a lease agreement for our corporate headquarters. Under the terms of the lease, a $6.0 million certificate of deposit is required through November 2012, unless the lease is terminated prior to that date. |
(2) | The number of shares of our common stock to be outstanding immediately after this offering is based on the number of shares outstanding on September 30, 2003, and excludes: |
| 7,507,829 shares of common stock subject to outstanding options granted under our stock option plans at a weighted average exercise price of $17.92 per share; | |
| 1,179,545 shares of common stock reserved for future stock option grants and restricted stock awards under our stock option plans; and | |
| 311,332 shares of common stock available for issuance under our employee stock purchase plan. |
S-15
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
Purchase Accounting
On July 23, 2003, we acquired substantially all of the assets and assumed certain liabilities of uRoam for cash of $25.0 million. We also incurred $2.4 million of direct transaction costs for a net purchase price of $27.4 million. We have hired substantially all of uRoams 20 employees consisting of product development, sales and service personnel.
We accounted for the acquisition under the
purchase method of accounting in accordance with Statement of
Financial Accounting Standards No. 141 Business
Combinations (SFAS No. 141). Under the purchase
method of accounting, the total purchase price is allocated to
the tangible and intangible assets acquired and the liabilities
assumed based on their estimated fair values. The excess of the
purchase price over those fair values is recorded as goodwill.
The fair value assigned to the tangible and intangible assets
acquired and liabilities assumed are based on estimates and
assumptions provided by management, and other information
compiled by management, including an independent valuation,
prepared by an independent valuation specialist that utilizes
established valuation techniques appropriate for the technology
industry. The purchase price allocation is as follows:
Assets acquired
(in thousands)
$
335
4
3,000
24,188
$
27,527
$
(29
)
(125
)
$
(154
)
$
27,373
To determine the value of the developed technology, a combination of cost and market approaches were used. The cost approach required an estimation of the costs required to reproduce the acquired technology. The market approach measures the fair value of the technology through an analysis of recent comparable transactions. The $3.0 million allocated to developed technology will be amortized on a straight-line basis over an estimated useful life of five years. The $24.2 million allocated to goodwill will not be amortized but will be subject to at least an annual impairment test under the requirements of Statement of Financial Accounting Standards No. 142 Goodwill and other Intangible Assets.
Pro Forma Statements of Operations
The following unaudited pro forma condensed combined consolidated statements of operations have been derived by the application of pro forma adjustments to the historical consolidated financial statements of F5 Networks and uRoam. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with these unaudited pro forma condensed combined consolidated statements of operations.
The unaudited pro forma condensed combined consolidated statements of operations combines the consolidated statement of operations of F5 Networks for the year ended September 30, 2003 with uRoams unaudited statement of operations for the nine months ended June 30, 2003 and the unaudited statement of operations for the period July 1, 2003 through July 23, 2003, the effective date of the acquisition by F5 Networks of substantially all of the assets of uRoam.
S-16
As a result of different fiscal year ends of F5 Networks and uRoam, financial information has been combined for different periods in the pro forma statements of operations. The unaudited pro forma condensed combined consolidated statements of operations for the year ended September 30, 2003 has been prepared to reflect the acquisition as if the acquisition occurred at the beginning of the period. Certain reclassifications have been made to conform uRoams historical and pro forma amounts to F5 Networks financial statement presentation.
The unaudited pro forma condensed combined
consolidated statements of operations is based on estimates and
assumptions. These estimates and assumptions have been made
solely for purposes of developing this pro forma information,
which is presented for illustrative purposes only and is not
necessarily indicative of the combined statements of operations
or results of operations of future periods or the results that
actually would have been realized had the entities been a single
entity during these periods.
Unaudited Pro Forma Condensed Combined
Consolidated
uRoam
Period From
F5 Networks
F5 Networks
Nine Months
July 1, 2003
Year Ended
Year Ended
Ended
Through
September 30,
September 30,
June 30,
July 23,
Pro Forma
2003
2003
2003
2003
Adjustments
Pro Forma
(in thousands, except per share amounts)
$
115,895
$
969
$
48
$
$
116,912
26,905
58
6
600
(a)
27,569
88,990
911
42
(600
)
89,343
65,472
3,113
313
68,898
19,246
2,148
140
21,534
83
83
84,801
5,261
453
90,515
4,189
(4,350
)
(411
)
(600
)
(1,172
)
751
(546
)
24
(b)
229
4,940
(4,896
)
(411
)
(576
)
(943
)
853
853
$
4,087
$
(4,896
)
$
(411
)
$
(576
)
$
(1,796
)
$
0.15
$
(0.07
)
26,453
26,453
$
0.14
$
(0.07
)
28,220
26,453
(a) | Cost of net revenues has been increased by $600,000 for the year ended September 30, 2003. The increase reflects additional amortization of developed technology acquired in the acquisition. The developed technology of $3.0 million has an estimated useful life of five years and has been reflected as if the acquisition occurred at the beginning of the period. |
(b) | For the year ended September 30, 2003 other income (expense), net has been adjusted to eliminate $522,000. The decrease reflects the historical interest income that was earned on cash held by F5 Networks that was used to fund the acquisition. Additionally, other income (expense), net has been adjusted to eliminate $546,000 for the same respective periods for historical interest expense on uRoams short-term debt and capital lease obligations. |
(c) | The net loss reported for uRoam is the net loss from continuing operations. |
S-17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial
data set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and notes thereto included elsewhere or
incorporated by reference in this prospectus supplement. The
consolidated balance sheet data as of September 30, 2003
and 2002 and the consolidated statement of operations data for
the three years ended September 30, 2003 are derived from
the consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and which
are included elsewhere or incorporated by reference in this
prospectus supplement. The consolidated balance sheet data as of
September 30, 2001, 2000 and 1999 and the consolidated
statement of operations data for the two years ended
September 30, 2000 are derived from the consolidated
financial statements that have been audited by
PricewaterhouseCoopers LLP, that are not included or
incorporated by reference in this prospectus supplement.
Historical results are not necessarily indicative of results to
be expected in the future.
Years Ended September 30,
2003
2002
2001
2000
1999
(in thousands)
$
84,197
$
82,566
$
78,628
$
87,980
$
23,420
31,698
25,700
28,739
20,665
4,405
115,895
108,266
107,367
108,645
27,825
17,837
20,241
33,240
24,660
5,582
9,068
10,238
12,265
7,911
1,618
26,905
30,479
45,505
32,571
7,200
88,990
77,787
61,862
76,074
20,625
53,458
50,581
50,767
36,890
13,505
19,246
17,985
17,435
14,478
5,642
12,014
15,045
18,776
9,727
3,869
3,274
975
83
443
2,625
2,127
2,487
84,801
87,328
90,578
63,222
25,503
4,189
(9,541
)
(28,716
)
12,852
(4,878
)
751
1,420
2,021
2,903
534
4,940
(8,121
)
(26,695
)
15,755
(4,344
)
853
489
4,095
2,105
$
4,087
$
(8,610
)
$
(30,790
)
$
13,650
$
(4,344
)
$
0.15
$
(0.34
)
$
(1.36
)
$
0.65
$
(0.42
)
26,453
25,323
22,644
21,137
10,238
$
0.14
$
(0.34
)
$
(1.36
)
$
0.59
$
(0.42
)
28,220
25,323
22,644
23,066
10,238
S-18
Years Ended September 30,
2003
2002
2001
2000
1999
(in thousands)
$
44,878
$
80,333
$
69,783
$
53,199
$
24,797
6,000
6,000
6,000
6,000
3,013
34,132
1,346
148,173
126,289
124,663
122,420
42,846
1,735
1,315
1,167
238
110,429
93,685
96,488
87,685
31,973
(1) | Restricted cash represents an escrow account established in connection with a lease agreement for our corporate headquarters. Under the terms of the lease, a $6.0 million certificate of deposit is required through November 2012, unless the lease is terminated prior to that date. |
S-19
MANAGEMENTS DISCUSSION AND ANALYSIS
You should read this discussion together with
the financial statements and other financial information
included and incorporated by reference in this prospectus
supplement. This prospectus supplement contains forward looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those indicated in the
forward looking statements. Please see Forward-Looking
Statements elsewhere in this prospectus
supplement.
Years Ended September 30,
2003
2002
2001
(in thousands, except for percentages)
$
84,197
$
82,566
$
78,628
31,698
25,700
28,739
$
115,895
$
108,266
$
107,367
72.6
%
76.3
%
73.2
%
27.4
23.7
26.8
100.0
%
100.0
%
100.0
%
Net Revenues. Total net revenues increased 7.0% in fiscal year 2003 from fiscal year ended September 30, 2002, or fiscal year 2002, compared to an increase of 0.8% in fiscal year 2002 from fiscal year 2001. International revenues represented 34.9%, 32.2% and 33.3% of net revenues in fiscal years 2003, 2002 and 2001, respectively. We expect international sales will continue to represent a significant portion of net revenues, although we cannot provide assurance that international revenues as a percentage of net revenues will remain at current levels.
Net product revenues were $84.2 million for fiscal year 2003 compared to $82.6 million for fiscal year 2002 and $78.6 million for fiscal year 2001. The 2.0% increase in fiscal year 2003 was primarily the result of sales in Asia Pacific and Europe. The 5.0% increase in fiscal year 2002 was primarily the result of strong sales in North America, partially offset by decreased sales in the Asia Pacific region.
Sales of our BIG-IP products represented 82.8%, 84.1% and 78.9% of total product revenues in fiscal years 2003, 2002 and 2001, respectively. Our BIG-IP products consist of server appliances and IP application switches. Our IP application switch products, including BIG-IP 1000, BIG-IP 2400 and the BIG-IP 5100 were introduced in the first quarter of fiscal year 2003 and represented 41.8% of product revenues in fiscal year 2003. We expect to continue to derive a significant portion of our product revenues from sales of BIG-IP in the future and expect the percentage of BIG-IP revenues derived from IP application switches to continue to increase as a percentage of total product revenues.
Net service revenues were $31.7 million for fiscal year 2003 compared to $25.7 million for fiscal year 2002 and $28.7 million for fiscal year 2001. Service revenues increased by 23.3% in fiscal year 2003 primarily due to an increase in the renewal of service and support contracts by existing customers, as our installed base increased. The 10.6% decrease in service revenues in fiscal year 2002 compared to fiscal year 2001 was primarily due to changes in pricing and a larger percentage of our resellers providing maintenance and installation to end-users, partially offset by an increase in the renewal of service and support contracts by existing customers.
Ingram Micro Inc., one of our domestic distributors, accounted for 12.6% of our total net revenues for fiscal year 2003. Ingram Micro accounted for 17.8% of our accounts receivable as of September 30, 2003.
S-20
Years Ended September 30, | ||||||||||||||
|
||||||||||||||
2003 | 2002 | 2001 | ||||||||||||
|
|
|
||||||||||||
(in thousands, except for | ||||||||||||||
percentages) | ||||||||||||||
Gross margin
|
||||||||||||||
Cost of net revenues:
|
||||||||||||||
Products
|
$ | 17,837 | $ | 20,241 | $ | 33,240 | ||||||||
Services
|
9,068 | 10,238 | 12,265 | |||||||||||
|
|
|
||||||||||||
Total
|
26,905 | 30,479 | 45,505 | |||||||||||
|
|
|
||||||||||||
Gross margin
|
$ | 88,990 | $ | 77,787 | $ | 61,862 | ||||||||
|
|
|
||||||||||||
Gross margin (as a percentage of related net
revenue)
|
||||||||||||||
Cost of net revenues:
|
||||||||||||||
Products
|
21.2 | % | 24.5 | % | 42.3 | % | ||||||||
Services
|
28.6 | 39.8 | 42.7 | |||||||||||
|
|
|
||||||||||||
Total
|
23.2 | 28.2 | 42.4 | |||||||||||
|
|
|
||||||||||||
Gross margin
|
76.8 | % | 71.8 | % | 57.6 | % | ||||||||
|
|
|
Cost of Net Product Revenues. Cost of net product revenues decreased to $17.8 million in fiscal year 2003 from $20.2 million in fiscal year 2002 and $33.2 million in fiscal year 2001. Cost of net product revenues decreased as a percent of net product revenue to 21.2% in fiscal year 2003 from 24.5% in fiscal year 2002 and 42.3% in fiscal year 2001. The decrease in fiscal year 2003 was primarily the result of lower warranty, manufacturing and component costs. The decrease in fiscal year 2002 was primarily the result of lower excess inventory charges and manufacturing costs partially offset by increased warranty costs. Further, in fiscal year 2002, we unified our supply chain with a single contract manufacturer and, as result, have improved our manufacturing efficiencies, as well as realized lower component costs.
Cost of Net Service Revenues. Cost of net service revenues decreased to $9.1 million in fiscal year 2003 from $10.2 million in fiscal year 2002 and $12.3 million in fiscal year 2001. Cost of net service revenues decreased as a percent of net service revenues to 28.6% in fiscal year 2003 from 39.8% in fiscal year 2002 and 42.7% in fiscal year 2001. The decrease in fiscal year 2003 was primarily due to a decrease in personnel related costs associated with a decline in service personnel headcount and related costs during the last quarter of fiscal year 2002. This decrease in fiscal year 2002 was primarily due to improved operational efficiencies and a decrease in headcount and related costs.
S-21
Years Ended September 30,
2003
2002
2001
(in thousands, except for
percentages)
$
53,458
$
50,581
$
50,767
19,246
17,985
17,435
12,014
15,045
18,776
3,274
975
83
443
2,625
$
84,801
$
87,328
$
90,578
46.1
%
46.7
%
47.3
%
16.6
16.6
16.2
10.4
13.9
17.5
3.0
0.9
0.1
0.5
2.5
73.2
%
80.7
%
84.4
%
Sales and Marketing. Sales and marketing expenses consist primarily of the salaries, commissions and related benefits of our sales and marketing staff, the costs of our marketing programs, including public relations, advertising and trade shows, and an allocation of our facilities and depreciation expenses. Sales and marketing expenses increased 5.7% to $53.5 million in fiscal year 2003 from $50.6 million in fiscal year 2002. The increase in fiscal year 2003 related primarily to increased payroll and related personnel costs, and travel related expenses. Sales and marketing expenses decreased to $50.6 million in fiscal year 2002 from $50.8 million in fiscal year 2001. The decrease in fiscal year 2002, compared to fiscal year 2001, was due to a decrease in trade show and promotional activities and decreased business travel expenses, partially offset by increased personnel costs as we continued to expand our international operations. We expect to continue to increase sales and marketing expenses in order to grow net revenues and expand our brand awareness.
Research and Development. Research and development expenses consist primarily of the salaries and related benefits for our product development personnel and an allocation of our facilities and depreciation expenses. Research and development expenses increased 7.0% to $19.2 million in fiscal year 2003, from $18.0 million in fiscal year 2002 and $17.4 million in fiscal year 2001. The increase in fiscal year 2003 was due to increased personnel related costs associated with an increase in headcount to 145 from 127 primarily as a result of the acquisition of substantially all the assets of uRoam and an increase in prototype expenses. The increase in fiscal year 2002 was due to increased personnel related costs and expenses related to the development of new products. We expect to continue to increase research and development expenses as our future success is dependent on the continued enhancement of our current products and our ability to develop new products that meet the changing needs of our customers.
General and Administrative. General and administrative expenses consist primarily of the salaries, benefits and related costs of our executive, finance, information technology, human resource and legal personnel, third-party professional service fees, bad debt charges and an allocation of our facilities and depreciation expenses. General and administrative expenses decreased 20.1% to $12.0 million in fiscal year 2003 from $15.0 million in fiscal year 2002 and $18.8 million in fiscal year 2001. The decrease in fiscal year 2003 is primarily due to a decrease in professional services related to patent prosecution and other activities related to our intellectual property and lower bad debt charges. The decrease in fiscal year 2002 is primarily due to lower bad debt charges and lower facilities expenses resulting from the sublease of one
S-22
Restructuring Charges. During the third quarter of fiscal year 2002, we recorded a restructuring charge of $2.8 million in connection with managements decision to exit the cache appliance business. As a result of changes in the business, we wrote down certain assets, consolidated operations and terminated 47 employees throughout all divisions of F5 Networks. In July 2002, all identified employees had been notified and terminated resulting in an additional charge of $0.5 million related to employee separation costs.
During the first fiscal quarter of 2001, we recorded a restructuring charge totaling $1.1 million in connection with our managements decision to bring operating expenses in line with the business revenue growth model. Accordingly, we terminated 96 employees throughout all divisions of F5 Networks. By the end of January 2001, all identified employees had been terminated. During the quarter ended March 31, 2001, we reversed $96,000 of previous estimates. As of September 30, 2001, substantially all of the restructuring charges accrued during the first quarter of 2001 had been paid. See note 8 to our consolidated financial statements included elsewhere in this prospectus supplement for a discussion of continuing restructuring liabilities.
Amortization of Unearned Compensation.
We have recorded a total of
$8.3 million of stock compensation costs since our
inception through September 30, 2003. These charges
represent the difference, on the grant date, between the
exercise price and the deemed fair value of certain stock
options granted to our employees and outside directors. These
options generally vest ratably over a four-year period. We are
amortizing these costs using an accelerated method as prescribed
by Financial Accounting Standards Board, or FASB, interpretation
No. 28 (FIN No. 28) and recorded stock compensation
charges of $0.1 million, $0.4 million, and
$2.6 million for the fiscal years 2003, 2002 and 2001,
respectively. Unamortized stock-based compensation totaled
$10,000 at September 30, 2003.
Years Ended September 30,
2003
2002
2001
(in thousands, except for
percentages)
$
4,189
$
(9,541
)
$
(28,716
)
751
1,420
2,021
4,940
(8,121
)
(26,695
)
853
489
4,095
$
4,087
$
(8,610
)
$
(30,790
)
3.6
%
(8.8
)%
(26.7
)%
0.7
1.3
1.9
4.3
(7.5
)
(24.9
)
0.8
0.5
3.8
3.5
%
(8.0
)%
(28.7
)%
Other Income, Net. Other income, net, consists primarily of investment income and foreign currency transaction gains and losses. Other income, net, decreased 47.1% to $0.8 million in fiscal year 2003 from $1.4 million in fiscal year 2002 and $2.0 million in fiscal year 2001. The decrease in fiscal year 2003 was primarily due to realized losses on sales of investments, declining interest rates and interest income, and an increase in foreign currency transaction losses. The decrease in fiscal year 2002 was related to declining interest rates and investment income.
S-23
Provision for Income
Taxes.
The provision for income
taxes was $0.9 million, $0.5 million and
$4.1 million for fiscal years 2003, 2002 and 2001,
respectively. The provision for income taxes represents foreign
taxes related to our international operation, with the exception
of fiscal year 2001, which includes a charge of
$3.4 million to provide a full valuation allowance against
the net deferred tax assets. No federal or state income taxes
were provided in fiscal years 2002 or 2003.
Liquidity and Capital Resources
We have funded our operations with our cash
balances, cash generated from operations and proceeds from
public offerings.
We consider all highly liquid investments with
maturities of three months or less to be cash equivalents. Cash
and cash equivalents totaled $10.4 million at the end of
fiscal year 2003, compared to $20.8 million at the end of
fiscal year 2002 and $18.3 million at the end of fiscal
year 2001.
Cash provided by operating activities during
fiscal year 2003 was $14.6 million compared to
$9.5 million in fiscal year 2002 and cash used in operating
activities was $11.8 million in fiscal year 2001. Cash
provided by operating activities in fiscal years 2003 and 2002
resulted primarily from cash generated from net income, after
adjusting for non-cash charges, changes in operating assets and
liabilities and an increase in deferred revenue due to an
increase in the renewal of service and support contracts by
existing customers. Cash used in operating activities in fiscal
year 2001 resulted primarily from operating losses, partially
offset by a decrease in net accounts receivable.
Cash used in investing activities was
$38.1 million for the fiscal year 2003, $12.7 million
for fiscal year 2002 and $24.7 million for fiscal year
2001. The cash used in investing activities in fiscal year 2003
was primarily the result of the $27.4 million used to
acquire substantially all the assets of uRoam and purchase of
investments and property and equipment partially offset by the
sale of investments. Cash used in each of fiscal years 2002 and
2001 were due primarily to the purchase of investments and
property and equipment, partially offset by the sale of
investments.
Cash provided by financing activities was
$12.8 million for fiscal year 2003 compared to
$5.5 million for fiscal year 2002 and $36.3 million
for the fiscal year 2001. In fiscal years 2003 and 2002, our
financing activities primarily related to cash received from the
exercise of employee stock options and the purchase of common
shares under our employee stock purchase plan. In fiscal year
2001, we also received $34.9 million related to the
issuance of common stock and warrants to Nokia Finance
International B.V. The warrants expired in January 2003 without
being exercised.
We expect that our existing cash balances and
cash from operations will be sufficient to meet our anticipated
working capital and capital expenditures for the foreseeable
future.
Contractual Obligations and Commercial
Commitments
As of September 30, 2003, our principal
commitments consisted of obligations outstanding under operating
leases. In April 2000, we amended and restated the lease
agreement relating to two buildings for our corporate
headquarters. The lease commenced in July 2000 on the first
building; and the lease on the second building commenced in
September 2000. The lease for both buildings expires in 2012
with an option for renewal. The lease for the second building
has been fully subleased through 2012. We
S-24
Quantitative and Qualitative Disclosure About
Market Risk
Interest Rate Risk.
Our cash equivalents consist of
high-quality securities, as specified in our investment policy
guidelines. The policy limits the amount of credit exposure to
any one issue or issuer to a maximum of 20% of the total
portfolio with the exception of treasury securities, commercial
paper and money market funds, which are exempt from size
limitation. The policy requires investments in securities that
mature in two years or less, with the average maturity being one
year or less. These securities are subject to interest rate risk
and will decrease in value if interest rates increase. A
decrease of one percent in the average interest rate would have
resulted in a decrease of approximately $0.7 million in our
interest income.
Foreign Currency Risk.
The majority of our sales and
expenses are denominated in U.S. dollars and as a result, we
have not experienced significant foreign currency transaction
gains and losses to date. While we have conducted some
transactions in foreign currencies during the fiscal year ended
September 30, 2003 and expect to continue to do so, we do
not anticipate that foreign currency transaction gains or losses
will be significant at our current level of operations. However,
as we continue to expand our operations internationally, they
may become significant in the future. We have not engaged in
foreign currency hedging to date. However, we may do so in the
future.
Critical Accounting Policies
Our consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires
S-25
We believe the following critical accounting
policies affect the more significant judgments and estimates
used in the preparation of our financial statements.
Revenue Recognition.
We recognize revenue in accordance
with the guidance provided under Statement of Position
(SOP) No. 97-2, Software Revenue
Recognition, and SOP No. 98-9 Modification of
SOP No. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions. Statement of Financial Accounting
Standards (SFAS) No. 48, Revenue Recognition
When Right of Return Exists, and Securities and Exchange
Commission, or SEC, Staff Accounting Bulleting
(SAB) No. 101, Revenue Recognition in Financial
Statements.
We sell products through resellers, OEMs, and
other channel partners, as well as directly to end users, under
similar terms. We recognize product revenue upon shipment, net
of estimated returns, provided that collection is determined to
be probable and no significant obligations remain. Product
revenues from OEM agreements are recognized based on reporting
of sales from the OEM partner. Whenever a software license,
hardware, installation and post-contract customer support, or
PCS, elements are combined into a package with a single
bundled price, a portion of the sales price is
allocated to each element of the bundled elements based on their
respective fair values as determined when the individual
elements are sold separately. Revenues from the license of
software are recognized when the software has been shipped and
the customer is obligated to pay for the software. When rights
of return are present and we cannot estimate returns, we
recognize revenue when such rights of return lapse. Revenues for
PCS are recognized on a straight-line basis over the service
contract term. PCS includes rights to upgrades, when and if
available, a limited period of telephone support, updates, and
bug fixes. Installation revenue is recognized when the product
has been installed at the customers site. Consulting
services are customarily billed at fixed rates, plus
out-of-pocket expenses, and revenues are recognized when the
consulting has been completed. Training revenue is recognized
when the training has been completed.
Our ordinary payment terms to our domestic
customers are net 30 days. Our ordinary payment terms to
our international customers are net 30 to 90 days based on
normal and customary trade practices in the individual markets.
We have offered extended payment terms beyond ordinary terms to
some customers. For these arrangements, revenue is recognized
when payments become due.
Reserve for Doubtful Accounts.
Estimates are used in determining
our allowance for doubtful accounts and are based on a
percentage of our accounts receivable by aging category. In
determining these percentages, we evaluate historical
write-offs, current trends in the credit quality of our customer
base, as well as changes in the credit policies. We perform
ongoing credit evaluations of our customers financial
condition and generally do not require any collateral. If there
is a deterioration of a major customers credit worthiness
or actual defaults are higher than our historical experience,
our allowance for doubtful accounts may not be insufficient.
Reserve for Product
Returns.
Product returns are
estimated based on historical experience by type of product and
are recorded at the time revenues are recognized. In some
instances, product revenue from distributors is subject to
agreements allowing rights of return. Accordingly, we reduce
recognized revenue for estimated future returns at the time
revenue is recorded. When rights of return are present and we
cannot estimate returns, revenue is recognized when such rights
lapse. The estimates for returns are adjusted periodically based
upon changes in historical rates of returns, inventory in the
distribution channel, and other related factors. It is possible
that these estimates will change in the future or that the
actual amounts could vary from our estimates and result in
reductions to recognized revenues.
Reserve for Excess or Obsolete Inventory.
We currently reserve for estimated
obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated net realizable
value based upon assumptions about future demand and market
conditions. If actual market
S-26
Reserve for Warranties.
A warranty reserve is established
based on our historical experience and an estimate of the
amounts necessary to settle future and existing claims on
products sold as of the balance sheet date. While we believe
that our warranty reserve is adequate and that the judgment
applied is appropriate, such amounts estimated to be due and
payable could differ materially from what will actually
transpire in the future.
Income Tax Valuation
Allowance.
The Company has net
deferred tax assets at September 30, 2003 totaling
approximately $30.7 million, which are fully offset by a
valuation allowance due to managements determination that
the criteria for recognition have not been met. In the event
management were to determine that the Company would be able to
realize its net deferred tax assets in the future, an adjustment
to the deferred tax assets would be made, increasing net income
(or decreasing net loss) in the period in which such a
determination was made.
As of September 30, 2003, approximately
$12.7 million of the valuation allowance related to the
Companys net operating loss carry forwards is derived from
the tax benefits of stock option deductions. At such time as the
valuation allowance related to their deductions is released, the
benefits will be credited to additional paid in capital.
Purchase Price
Allocation.
During 2003, the
Company acquired substantially all of the assets and assumed
certain liabilities of uRoam, Inc. for cash of
$25.0 million. The Company also incurred $2.4 million
of direct transaction costs for a total purchase price of
$27.4 million. The total purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed based on their estimated fair value. The excess of the
purchase price over the fair value was recorded as goodwill. The
fair value assigned to the tangible and intangible assets
acquired and liabilities assumed were based upon estimates and
assumptions developed by management and other information
compiled by management.
Recent Accounting Pronouncements
In May 2003, FASB issued Statement of Financial
Accounting Standard No. 150 Accounting for Certain
Financial Instruments with Characteristics of Both Liability and
Equity (SFAS No. 150). SFAS No. 150 establishes
standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003.
The adoption of this standard did not have an impact on our
consolidated financial statements.
In April 2003, FASB issued Statement of Financial
Accounting Standards No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (SFAS
No. 149), which is generally effective for contracts
entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. SFAS
No. 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a
derivative as discussed in Statement of Financial Accounting
Standards No. 133, when a derivative contains a financing
component, amends the definition of an underlying to
conform it to the language used in FASB interpretation
No. 45, Guarantor Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others and amends certain other existing
pronouncements. The adoption of this standard did not have an
impact on our consolidated financial statements.
In January 2003, FASB issued Interpretation
No. 46 (FIN No. 46), Consolidation of
Variable Interest Entities, which addresses consolidation
by business enterprises of variable interest entities that
either: (1) do not have sufficient equity investment at
risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) the
company will hold a significant variable interest in, or have
significant involvement with, an existing variable interest
entity. The adoption of this interpretation did not have an
impact on our consolidated financial statements.
S-27
In November 2002, FASB issued Interpretation
No. 45 (FIN No. 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which
addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees. FIN No. 45 also requires the
recognition of a liability by a guarantor at the inception of
certain guarantees that are entered into or modified after
December 31, 2002. The additional disclosures required by
FIN No. 45 have been included in the notes to our
consolidated financial statements.
S-28
Years Ended September 30,
2003
2002
2001
(in thousands)
$
10,351
$
20,801
$
18,321
14,610
9,505
(11,833
)
(38,053
)
(12,663
)
(24,709
)
12,833
5,483
36,343
Table of Contents
Payments Due by Period
Less than
1-3
4-5
After 5
Obligations
Total
1 year
Years
Years
Years
(in thousands)
$
18,474
$
2,727
$
4,306
$
3,971
$
7,470
Maturing in
Three months
Three months
Greater than
or less
to one year
one year
Total
Fair value
(in thousands, except for percentages)
$
3,972
$
$
$
3,972
$
3,972
1.1
%
$
29,409
$
5,118
$
$
34,527
$
34,527
1.6
%
2.1
%
$
$
$
34,132
$
34,132
$
34,132
2.0
%
$
3,582
$
$
$
3,582
$
3,582
1.9
%
$
$
41,591
$
17,941
$
59,532
$
59,532
2.2
%
3.3
%
$
8,169
$
$
$
8,169
$
8,169
4.1
%
$
$
33,500
$
17,294
$
50,794
$
51,462
4.6
%
3.4
%
Table of Contents
Table of Contents
Table of Contents
Table of Contents
BUSINESS
Introduction
We develop, manufacture and sell products and services to help companies efficiently and securely manage their Internet traffic, as well as the access and use of their intranet-based software applications. Our application traffic management products, including the BIG-IP Controller, 3-DNS Controller and BIG-IP Link Controller, help manage Internet traffic to servers and network devices in a way that maximizes the availability, scalability and throughput of those network components and the applications that run on them. Our recently acquired FirePass family of network server appliances provides secure user access to corporate networks and individual applications through any standard Web browser. Our unique iControl architecture enables our products to communicate with one another in the network and ensure optimal throughput of traffic, and also allows them to be integrated with third party products, including enterprise applications. This facilitates the automation of repetitive processes and allows the customer to optimize applications on their networks, thereby saving them time and money. As components of an integrated solution, our products address many elements required for successful Internet and intranet business applications, including high availability, high performance, intelligent load balancing, streamlined manageability, remote access to corporate networks, and network and application security. Our solution for application traffic management and security is software-based, which differentiates us from our competitors whose solutions are largely hardware-based. We believe this differentiation enables us to offer our customers greater flexibility, cost-effectiveness and adaptability in response to todays rapidly changing environment.
Enterprise customers in financial services, manufacturing, transportation and mobile telecommunications make up the largest percentage of our customer base. We market and sell our products primarily through indirect sales channels in North America, Europe and the Asia Pacific region, and to some direct customer accounts in North America. We have subsidiaries or branch offices in Australia, Canada, China, France, Germany, Hong Kong, Japan, The Netherlands, Singapore, South Korea, Spain, Taiwan, Thailand and the United Kingdom.
In July 2003, we acquired substantially all of the assets and assumed certain liabilities of uRoam for $25.0 million in cash. We also incurred $2.4 million of direct transaction costs for a net purchase price of $27.4 million. We hired substantially all of uRoams 20 employees, consisting of product development, sales and service personnel. uRoams family of FirePass servers is a comprehensive remote access product set that enables users to access applications in a secure fashion, using technology based on the SSL standard. We believe FirePass provides a security solution that is easier to manage and use, and is more secure, than existing VPN solutions, allowing customers to realize significant cost savings for secure remote access to any application. The acquisition of substantially all of the assets of uRoam will allow us to quickly enter the SSL VPN market, broaden our customer base and augment our existing product line.
Industry Background
As a result of the Internets capabilities, it has become a fundamental tool for commerce and communications. Since the late 1990s, businesses have responded to the power, flexibility and economy of the Internet by deploying new IP based applications, upgrading their client-server applications to new IP-enabled versions, and enabling existing applications for use over the Internet. IP is a communications language that is used for transmitting data over the Internet. During the next several years, we believe this process of deploying IP-enabled applications will accelerate as Web services enable businesses to build applications quickly and easily by integrating software modules available from many different sources. Web services allow businesses to combine functions of existing applications and processes to create new applications and functionality operating over the Internet and beyond the corporate firewall. The purpose of Web services is to enable applications to interact with each other more smoothly, reducing inefficiencies associated with human intervention. A fully-integrated, Web services-enabled computing network would allow personal computers, servers, handheld devices, programs, applications and network equipment to work together directly to generate more efficient data flow and application development and use. In
S-29
Current traffic management products are designed primarily to manage Web traffic. However, few products are equipped with the functionality and flexibility to securely manage the full range of IP-enabled applications, such as Oracle Financials, BEA Weblogic and Siebel Sales Force Automation.
Internet Architecture
The Open Systems Interconnect Reference Model, or OSI Model, is the framework that describes and defines how networked systems communicate with one another. The OSI Model divides network functions into seven layers and specifies how the layers should interact to enable interoperability between the various users. These interoperability standards have been designed to allow all parts of the network to work together, regardless of the different hardware and software components. IP requires all data transmitted across the Internet to be divided into packets prior to its transmission, and reassembled at its destination. Prior to transmission, each packet of data is automatically given a header that identifies the source and destination of the packet. This header information is used in the OSI Model for the purposes of identifying, routing and sequencing data packets, and is stripped from the data upon arrival at its destination.
Layer 4-7 Traffic Management
Layers 2 and 3 of the OSI Model primarily perform standardized, repetitive tasks such as ensuring that packets of information sent over the Internet arrive at the destination to which they are addressed, and reassembling them in the correct sequence. Unlike Layers 2 and 3, Layers 4-7 are complex and variable and must support end-user applications and processes on a wide variety of platforms and devices. For example, Layer 7 (which encompasses the functions of Layers 5 and 6) enables email, directory look-up and the transfer of files between otherwise incompatible systems.
While traditional Layer 2/3 switching devices are used primarily to ensure correct delivery of packets of information, there is an increasing need for Layer 7 technology that can read the entire contents of a packetized transmission and make intelligent decisions based on a dynamic set of business rules about how to handle the transmission and where to route it to ensure the availability and optimal performance of applications, servers and the network. Additionally, Layer 2/3, as well as Layer 4, switching devices are primarily hardware-based and are optimized for speed at the expense of flexibility. While most manufacturers of Layer 7 switching devices have also opted for the traditional, costly, hardware-based solutions, this limits the ability of their products to adapt to the rapidly changing requirements of Layer 7 traffic management needed for common end-user applications today.
According to the Ethernet Switch Report 5-Year Forecast prepared by DellOro Group, the traditional Layer 4-7 traffic management market is expected to grow from $432 million in 2002 to $870 million in 2007, representing a five-year compounded annual growth rate of approximately 15%. Additional emerging growth markets for Layer 4-7 traffic management include blade servers, mobile IP and Web services. A blade server is a thin, modular electronic circuit board intended for a single, dedicated application (such as serving Web pages or server load balancing) that can be easily inserted into a space-saving chassis with many similar blade servers. Blade servers, loaded into chassis, are designed to consume less energy and require considerably less space than conventional servers.
Growth in Demand for Secure Traffic Management
As Internet traffic and the use of IP-enabled applications have increased, the demands placed on Layer 7 have also increased and so has the demand for integrated, effective Layer 7 traffic management solutions. Corporations are becoming more reliant on highly sophisticated IP-enabled applications both for their internal operations and for interactions with external customers and partners. The need to guarantee
S-30
SSL is also the core of new technology that addresses the growing need for corporations to provide secure connectivity for the rapidly increasing number of users who access corporate networks and applications from remote locations using a variety of devices ranging from home personal computers and laptops to cellular telephones and personal digital assistants. Many companies currently provide remote access to offsite users through VPNs based on the Internet Protocol Security, or IPSec, framework, which allows remote users to access corporate networks and applications by means of encrypted tunnels through the Internet. VPNs are cost-effective because they use the Internet for low-cost transmission of information while providing remote users with a highly secure connection. However, a key security risk associated with IPSec VPNs is that once remote users are connected, they have unrestricted access to all applications and resources within the network.
During the past year, new VPN technology using the SSL protocol has steadily gained acceptance as a more cost-effective solution that is both simpler to deploy and easier to manage than IPSec VPNs. Unlike IPSec VPNs, SSL VPNs do not require customers to purchase and install client-side software on every remote device that accesses the network. Instead, they use the SSL capabilities resident in a remote clients Internet browser to establish and maintain a secure connection between the client and the VPN server. This eliminates both the initial cost of distributing and implementing client-side software and the recurring costs of upgrading and maintaining it. In addition to providing secure network access, SSL technology can also be used to selectively limit access to certain applications and resources within the network, depending on the identity of the user. Because of the improved security and reduced overall costs, we believe SSL-based solutions will become the dominant method for remote access within the next few years.
According to Infonetics Researchs VPN and Firewall Products Quarterly Worldwide Market Share and Forecasts for 2Q03 report, the SSL VPN market is expected to grow from $34 million in 2002 to $607 million by 2006, representing a four-year compounded annual growth rate of approximately 105%.
The F5 Solution
We believe our products are superior to those of our competitors in addressing the growing need among enterprises for integrated, secure, application traffic management.
Software Based Products. From our inception, we have been committed to the belief that the complexity of Layer 7 traffic management requires a software-based rather than a hardware-based solution. We believe our software-based solution for application traffic management and security using commodity hardware provides greatly increased functionality. We also believe our products are more cost-effective, flexible and easily adaptable to todays constantly changing and increasingly demanding environments than our competitors solutions, which are primarily hardware-based. In addition, our software can be easily ported to commodity hardware platforms manufactured by third-party vendors, which has enabled us to license the software to our OEM partners who resell it installed on their own products. It has also created an opportunity for us to sell versions of our software that run on blade servers manufactured by third-party vendors, thereby increasing the target market for our software.
Application Awareness. One of the most important features of our software-based products is their application awareness. Our products are designed using a common architecture, called iControl, with a common interface that allows them to communicate with one another and with third-party software and devices. Through our unique, open, iControl API, third-party applications and network devices can take an active role in shaping IP network traffic, directing traffic based on exact business requirements specified by
S-31
Another key benefit of our software-based solution is that it allows the customer to incorporate specific business rules and processes into the software. This capability, which we call iRules, is a simple tool that can be used to define how the user wants to direct, persist on, or filter traffic based on the needs of each application.
Furthermore, our Universal Inspection Engine, the core of our application traffic management technology, is unique in its ability to inspect IP traffic down to the packet payload level and can direct traffic according to flexible iRules specified by the user. This deep packet inspection technology enables powerful offloading, inspection and processing of application-level transactions.
Integrated Traffic Management and Security Solution. Our application traffic management technology is differentiated from other solutions primarily by its ability to intercept, inspect and act on the contents of traffic from virtually every type of IP-enabled application. This deep packet inspection technology allows us to offer an integrated traffic management and security solution that can detect and prevent many network level attacks.
Our FirePass technology enables us to offer secure, remote access through SSL VPNs. FirePass has components that allow remote users to access any application or resource connected to the network, including legacy hosts, desktops and client-server applications. Over the course of the next twelve months we intend to combine our SSL VPN technology with our secure traffic management capabilities, providing significant differentiation from our competitors. This capability will enable our products to provide comprehensive application security at multi-gigabit speeds.
Combined with the sophisticated inspection and control capabilities of our application traffic management technology, we believe that FirePass technology is an ideal platform for the development of advanced application security gateways that can control access to individual applications and the data and resources they use. Because our BIG-IP software can examine the entire contents of a transmission, it can detect irregularities that might represent a security violation but which may pass undetected through an organizations firewall and other network security devices. As a result, we believe that FirePass is an ideal platform for the development of technology to protect the integrity of IP-based applications and the data and resources they use. In the future, we plan to use BIG-IP and FirePass to develop a comprehensive security solution that protects network applications from unauthorized access which existing safeguards may fail to prevent.
Strategy
Our objective is to be the leading provider of secure application traffic management solutions designed to enhance and optimize server availability, security and performance. Key components of our strategy include:
Offering a complete application security solution and product set. We plan to utilize our core technologies from our BIG-IP and FirePass products to deliver standalone and integrated systems that protect applications from hostile and inadvertent threats, including user-to-system application security and system-to-system application security problems. We believe these solutions will differentiate our products in the security market and provide a unique solution to the problem of vulnerability of mission-critical applications.
S-32
Increasing the addressable market for our products. In order to enable significant growth over the next three years, we intend to target logical extensions of our traditional traffic management market, including the areas of blade server software; mobile IP infrastructure, which is a mechanism for maintaining transparent network connectivity to mobile hosts; Web services infrastructure; and utility computing and data center virtualization infrastructure, in which corporations pay only for the computing resources they use. This allows their information technology resources to be allocated on an as-needed basis to meet rapidly changing business demands. In addition, we plan to enter adjacent markets, such as the application security market, with our first product offering being an SSL VPN solution.
Investing in technology to continue to meet customer needs. We plan to continue to invest in research and development to provide our customers with complete secure application traffic management and secure remote access solutions. Our software-based platforms are designed to quickly and easily expand the features and functionalities of our products, as well as enabling us to develop additional products that address the complex and changing needs of our customers. We will continue to use commodity hardware in order to ensure performance and cost competitiveness. We also plan to deliver specialized software modules that will allow our customers to purchase software for our platforms as upgrades with specific features based on specific requirements.
Enhancing the existing channel model. We are investing significant resources in order to further develop our indirect sales channels. We plan to expand our indirect sales channels through leading industry resellers, OEMs, systems integrators, Internet service providers and other channel partners. Also, we are leveraging our existing channels by delivering application security products, including FirePass SSL VPNs, making these channels more productive.
Continuing to build and expand relationships with strategic iControl partners. We plan to capitalize on our strategic relationships with enterprise software vendors who have created interfaces to our products through our iControl API. These vendors provide us significant leverage in the selling process, because they recommend our products to their customers. In order to differentiate ourselves further from our competitors we plan to explore opportunities to further embed iControl into existing and new third party products and to jointly market and sell our solutions to enterprise customers with these key partners.
Enhancing our brand. We plan to continue building brand awareness that positions us as one of the leading providers of secure application traffic management solutions. Our goal is for the F5 brand to be synonymous with superior performance, high-quality customer service and ease of use.
Products
Our core technology is software for IP application traffic management and secure remote access to IP networks and applications. We also manufacture several types of systems (which are software and hardware bundled together as an integrated product offering): BIG-IP server appliances; BIG-IP application switches; 3-DNS Controller; BIG-IP Link Controller; and FirePass SSL VPN servers, each incorporating our software with commodity components to provide a complete solution.
BIG-IP Software and Systems
Our flagship product is the BIG-IP Controller for local-area application traffic management. BIG-IP software runs on a variety of commodity hardware platforms, including IP application switches and server appliances manufactured by us and our OEM partners, as well as on blade servers manufactured by server vendors such as Dell Inc., Fujitsu Siemens Computers GmbH, Hewlett Packard Company, International Business Machines Corporation and NEC Corporation. The core of BIG-IP is sophisticated software that manages IP traffic at Layer 7, also known as the application layer. Our BIG-IP application switches also perform Layer 2/3 switching and, we believe, industry-leading Layer 4 switching. But we believe it is the superior performance and functionality of the BIG-IP Layer 7 traffic management software that distinguishes it from competing products sold by Cisco Systems, Nortel Networks and others. In addition, BIG-IP has a patented feature, known as cookie persistence, which establishes a link between a user
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BIG-IP server appliances were our original products and accounted for 16.9% of our product revenue for fiscal year 2003. The BIG-IP 520 and 540 server appliances are equipped with Intel processors for high-speed Layer 4-7 processing and are designed to accommodate easily-installed upgrade cards that provide fast, integrated SSL encryption and decryption. Integrated SSL processing has been an important factor of system sales. By offloading SSL processing, which requires significant server and computing power, from servers to our traffic management systems, customers can free up valuable server space for other applications.
In September 2001 we introduced our first IP application switch, the BIG-IP 5000, in response to customer demand for systems with an increased number of ports allowing them to be connected to many different types of network devices, integrated Layer 2/3 switching and SSL processing capability. We currently offer the high-end BIG-IP 5100, the BIG-IP 2400 mid-range product with integrated Layer 4 switching on an application-specific integrated circuit, or ASIC, developed by our hardware team, and the BIG-IP 1000 entry-level switch.
3-DNS and Link Controller
Our other traffic management products include 3-DNS Controller and BIG-IP Link Controller. 3-DNS allows enterprises with geographically dispersed data centers to direct traffic to a particular data center in accordance with customized business rules or to redirect traffic to an available data center if one of their sites becomes overloaded or is shut down for any reason. Link Controller allows enterprises with more than one Internet service provider to manage the use of their available bandwidth to minimize costs while ensuring the highest quality of service. 3-DNS and Link Controller are sold separately on individual IP application switches and server appliances, or bundled with BIG-IP on a single appliance or IP application switch.
FirePass
FirePass systems provide SSL VPN access for remote users of IP networks and any applications connected to those networks from any standard Web browser on any device. The components of FirePass include a dynamic policy engine, which manages user authentication and authorization privileges, and special components that enable corporations to give remote users controlled access to the full array of applications and resources within the network.
Our FirePass line of SSL VPN servers currently includes the FirePass 1000 and the FirePass 4000, which support 100 and 1000 concurrent users, respectively. Both support the complete range of FirePass software features and offer a comprehensive solution for Web-based remote access to corporate applications and desktops.
Enabling Technologies
Our products also come equipped with our iControl and iControl Services Manager, or iSM, functions, which are designed to facilitate the broader use of our products. In early 2001, we recognized a growing need for traffic management products that could not only communicate with one another, but also with the increasing number and variety of IP-enabled enterprise applications being deployed by large organizations. At that time we published the iControl interface in a free software development kit, or SDK, that allows customers and independent software vendors to modify their programs to communicate with our products. The use of iControl reduces or eliminates the need for human involvement, significantly reducing the cost of performing basic network functions and dramatically reducing the likelihood of error. Adding this extra functionality to their products is attractive to independent software vendors, and since the introduction of our iControl SDK, we have formed relationships with dozens of software developers including Microsoft Corporation, Oracle Corporation, BEA Systems, Inc., International Business Machines Corporation, Hewlett Packard Company, Siebel Systems, Inc., and Mercury Interactive Corporation.
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iControl Services Manager takes advantage of iControl to provide a single, centralized management and operational interface for our devices. This feature allows customers with dozens or hundreds of our products to upgrade or modify the software on those products simultaneously from a single console. This lowers the cost and simplifies the task of deploying, managing and maintaining our products and reduces the likelihood of error when blanket changes are implemented.
Product Development
Our future success depends on our ability to maintain technology leadership in secure application traffic management by constantly improving our products and by developing new products to meet the changing needs of our customers. Our product development group, which is divided along product lines, employs a standard process for the development, documentation and quality control of software and systems that is designed to meet these goals. We are currently focused on developing enhancements to our existing traffic management and SSL VPN products in order to deliver greater functionality and performance. We are also developing an integrated application security gateway, which will combine our security and traffic management technologies in order to deliver a network device that protects applications from hostile attacks. By ensuring user-to-system application security and system-to-system application security, the application security gateway will provide comprehensive application security.
In order to advance our product development, we also engage in technology partnerships with software and component manufacturers that allow us to integrate industry-standard technology with our own products. During the past two years, we have had a close working relationship with Broadcom Corporation, which manufactures the Layer 2/3 switch chips and SSL processors used in our family of application switches.
Our principal software engineering group, which develops our application traffic management technology, is located in our headquarters in Seattle, Washington. Our FirePass product development team, which includes the original developers of the technology, is located in San Jose, California. Our hardware engineering group is located in Spokane, Washington. Members of these teams collaborate closely with one another on specific projects.
During the fiscal years ended September 30, 2003, 2002 and 2001, we had research and product development expenses of $19.2 million, $18.0 million and $17.4 million, respectively.
Customers
We have a globally diversified base of customers, consisting primarily of large enterprises. Although we do not target specific vertical markets, enterprise customers in financial services, manufacturing, transportation and mobile telecommunications currently make up the largest percentage of our customer base. The other significant components of our customer base are Internet service providers, Internet hosting companies and Internet commerce companies. In fiscal year 2003, international sales represented 34.9% of our net revenues. See note 14 to our consolidated financial statements included elsewhere in this prospectus supplement for additional information regarding our revenues by geographic area.
Prior to fiscal year 2001, our end-user customer base was comprised primarily of Internet service providers, Internet hosting companies and Internet startups engaged in e-commerce. Starting in the first half of fiscal year 2001, as demand from those customers weakened, we successfully refocused our marketing and sales efforts on large enterprises, which currently account for the majority of our revenue, without any material adverse effect on our revenues. Consistent with our goal of building a strong channel sales model, the majority of our revenue is generated by sales though our distributors, value-added resellers and systems integrators.
For fiscal year 2003, sales to Ingram Micro Inc., one of our distributors, represented 12.6% of our revenues. Our agreement with Ingram Micro is a standard, non-exclusive distribution agreement that
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Sales and Marketing
Sales
We sell our software, systems and services to large enterprise customers through a variety of channels, including OEMs, distributors, value-added resellers and systems integrators. A substantial amount of our revenue for fiscal year 2003 was derived from these channel sales. We also sell our products and services to major accounts through our own direct sales force. In most cases, service contracts are negotiated directly with the customer. Typically, our agreements with our channel partners are not exclusive and do not prevent them from selling competitive products. These agreements typically have terms of one year with no obligation to renew, and typically do not provide for exclusive sales territories or minimum purchase requirements.
Direct sales. Our field sales personnel are located in major cities throughout North America, Europe and the Asia Pacific region. The inside sales team generates and qualifies leads for regional sales managers and helps manage accounts by serving as a liaison between the field and internal corporate resources. We sell our products directly to a limited group of customers, primarily OEMs, including Dell Inc., Fujitsu Siemens Computers GmbH, Hewlett Packard Company, International Business Machines Corporation and NEC Corporation, and certain large enterprise end-users whose accounts are managed by our major account services team. Field systems engineers also support our regional sales managers by participating in joint sales calls and providing pre-sale technical resources as needed. The majority of our field sales personnel work closely with our channel partners to assist them in selling our products to their customers, as the bulk of our sales are made through distributors or value-added resellers.
Distributor and value-added reseller relationships. We have established relationships with large national and international distributors, local and specialized distributors and value-added resellers. The distributors sell our products, and the value-added resellers not only sell our products, but also assist their customers in network design, installation and testing. Our primary distributor relationships include Ingram Micro Inc. in North America and in certain territories internationally, and our primary value-added reseller relationships include Milestone Systems, Inc.
Systems integrators. We also market our products through strategic relationships we have with systems integrators, which design and install networks that incorporate our systems. Systems integrators typically do not purchase and resell equipment to their customers. Instead they typically recommend equipment to their customers for use in the systems they design and install. We currently have relationships with a number of systems integrators, including Electronic Data Systems Corporation.
Marketing
The cornerstone of our marketing strategy is the establishment of strong partnerships with large, prominent companies that are leaders in their respective industries. By partnering with these firms, we have been able to gain visibility with prospective customers and access to large accounts that we would not have been able to achieve on our own. Currently, we have three principal types of marketing partnerships that overlap to varying degrees with our sales channel partnerships. These include:
iControl partnerships. We have established relationships with various independent software vendors who have adapted their applications to interact with our products via the iControl interface. iControl enhances the functionality of third party applications by enabling them to control the network in an automated way, based on business policies and rules associated with the application. As a result, customers who purchase iControl-enabled applications have an incentive to purchase our products in order to take advantage of the enhanced functionality made possible through our technical cooperation.
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Blade server relationships. We have relationships with various system vendors (Dell Inc., Fujitsu Siemens Computers GmbH, Hewlett Packard Company, International Business Machines Corporation and NEC Corporation) to market our BIG-IP Blade Controller software for use on their blade server systems. Market focus and strategy are different for each relationship. In some of these relationships, vendors or their channel partners resell Blade Controller software to their customers.
OEM partnership with Dell Inc. We license our software to Dell, which resells it on its own line of traffic management products. In conjunction with this arrangement, we participate in joint marketing programs with Dell.
We engage in a number of marketing programs and initiatives aimed at promoting our brand and creating market awareness of our technology and products. These include actively participating in industry trade shows and briefing industry analysts and members of the trade press on our latest products, and on new business and technology partnerships. In addition, we market our products to chief information officers and other information technology professionals through targeted advertising, direct mail and high-profile Web events.
Backlog
Our backlog represents orders confirmed with a purchase order for products to be shipped generally within 90 days to customers with approved credit status. Orders are subject to cancellation, rescheduling by customers or product specification changes by the customers. Although we believe that the backlog orders are firm, purchase orders may be cancelled by the customer prior to shipment without significant penalty. For this reason, we believe that our backlog at any given date is not a reliable indicator of future revenues.
Customer Service and Technical Support
Our ability to provide consistent, high-quality customer service and technical support is a key factor in attracting and retaining customers. Prior to the installation of our products, our services personnel work with customers to analyze their network needs and determine the best way to deploy our products and configure product features and functions to meet those needs. Our services personnel also provide on-site installation and training services to help customers make optimal use of product features and functions. Installation generally occurs within 30 days of product shipment to the customer.
At the time of purchase, customers typically purchase a one-year maintenance contract, renewable annually, which entitles them to an array of services provided by our technical support team. Maintenance services provided under the contract include online updates, software error correction releases, Ask F5, described below, and remote support through a 24 hours a day, 7 days a week help desk, although not all service contracts entitle a customer to round-the-clock call center support. Updates to our software are only available to customers with a current maintenance contract. Our technical support team also offers seminars and training classes for customers on the configuration and use of products, including local and wide area network system administration and management. In addition, we have a professional services team able to provide a full range of fee-based consulting services, including comprehensive network management, documentation and performance analysis, and capacity planning to assist in predicting future network requirements.
We also offer, as part of our maintenance service, an online, automated, self-help customer support function called Ask F5 that allows customers to answer many commonly asked questions without having to call our support desk. This allows the customer to rapidly address issues and questions, while significantly reducing the number of calls to our support desk. This enables us to provide comprehensive customer support while keeping our support related expenses at a manageable, consistent level.
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Manufacturing
We outsource the manufacturing of our pre-configured hardware platforms to a contract manufacturer, Solectron Corporation, which assembles each product to our specifications. Hardware platforms for our traffic management products consist primarily of a commodity computing platform, custom and commodity ASICs, a rack-mount enclosure system and a custom-designed front panel. Solectron also installs our application traffic management software onto these hardware platforms and conducts functionality testing, quality assurance and documentation control prior to shipping our products.
Our agreement with Solectron allows them to procure component inventory on our behalf based upon a rolling production forecast. Subcontractors supply Solectron with standard parts and components for our products based on our production forecast. We are contractually obligated to purchase component inventory that our contract manufacturer procures in accordance with the forecast, unless we give notice of order cancellation in advance of applicable lead times. For any completed product inventory carried by Solectron beyond 30 days, Solectron will charge us a monthly carrying fee of 1.5%. Alternatively, we have the option to purchase inventory held by Solectron beyond 30 days to avoid incurring related carrying charges. As protection against component shortages and to provide replacement parts for our service teams, we also stock limited supplies of certain key components for our products.
In addition, we obtain all of the Layer 2/3
switch chips and the SSL processors used in our family of
application switches from Broadcom Corporation. We purchase
components from Broadcom on a purchase order basis, with pricing
updated at agreed upon intervals. Certain products purchased
from Broadcom were designed with our input, but are not
exclusive to us. We also designed a Layer 4 ASIC, which is
used in one of our products and is manufactured for us by a
contract semiconductor foundry.
Competition
Our principal competitors in the traffic
management market are Cisco Systems, Inc. and Nortel Networks
Corporation. Other competitors in this market include Foundry
Networks, Inc., NetScaler, Inc. and Radware Ltd.
Cisco Systems has a product set similar to ours
and holds the largest share of the market. Cisco has a longer
operating history and significantly greater financial,
technical, marketing and other resources than we do. Cisco also
has a more extensive customer base and broader customer
relationships, including relationships with many of our current
and potential customers. In addition, Cisco has large,
well-established, worldwide customer support and professional
services organizations and a more extensive direct sales force
and sales channels.
Like Cisco, Nortel has a product set similar to
ours and has a longer operating history, greater resources, a
larger customer base and a larger sales and service
organization. Whereas Cisco has historically focused on large
corporate enterprise customers, Nortel has primarily focused on
telecommunications and Internet service provider customers.
Because of our relatively smaller size, market
presence and resources, Cisco, Nortel and other larger
competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer
requirements. There is also the possibility that these companies
may adopt aggressive pricing policies to gain market share. As a
result, our competitors pose a serious competitive threat that
could undermine our ability to win new customers and maintain
our existing customer base.
Our most prominent competitors in the SSL VPN
market are Aventail Corporation, Neoteris, Inc. and SafeWeb,
Inc. NetScreen Technologies, Inc. recently announced its
acquisition of Neoteris and Symantec Corp. recently announced
its acquisition of SafeWeb, with both moves designed to allow
the buyer to enter the SSL VPN market. Nokia Corporation and
Nortel Networks Corporation have also recently introduced SSL
VPN products. While we believe our FirePass products are
superior to their offerings, some of our competitors have
resources and distribution channels that are much larger than
ours and could give them a significant competitive advantage in
the SSL VPN market. We currently compete with Nortel in the
Layer 4-7 traffic management market, and Nokia resells our Layer
4-7 products. In the
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SSL VPNs are a potential replacement for IPSec
VPNs, the most widely deployed solution for secure remote access
today. The current leaders in the IPSec VPN market are Check
Point Software Technologies, Ltd. and NetScreen, both of which
are larger and better-known vendors than us.
Intellectual Property
We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure
to protect our intellectual property rights. We have obtained
three patents in the United States and have applications pending
for various aspects of our technology. Our future success
depends in part on our ability to protect our proprietary rights
to the technologies used in our principal products. Despite our
efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use
trade secrets or other information that we regard as
proprietary. In addition, the laws of some foreign countries do
not protect our proprietary rights as fully as do the laws of
the United States. We cannot assure you that any issued patent
will preserve our proprietary position, or that competitors or
others will not develop technologies similar to or superior to
our technology. Our failure to enforce and protect our
intellectual property rights could harm our business, operating
results and financial condition.
In addition to our own proprietary software, we
incorporate software licensed from several third-party sources
into our products. These licenses generally renew automatically
on an annual basis. We believe that alternative technologies for
this licensed software are available both domestically and
internationally.
Employees
As of September 30, 2003, we employed 507
full-time persons, including 145 in product development, 211 in
sales and marketing, 84 in professional services and technical
support and 67 in finance, administration and operations. None
of our employees is represented by a labor union. We have
experienced no work stoppages and believe that our employee
relations are good.
Legal Proceedings
In July and August 2001, a series of putative
securities class action lawsuits were filed in United States
District Court, Southern District of New York against certain
investment banking firms that underwrote our initial and
secondary public offerings, us and some of our officers and
directors. These cases, which have been consolidated under
In
re. F5 Networks, Inc. Initial Public Offering Securities
Litigation
, No. 01 CV 7055, assert that the
registration statements for our June 4, 1999 initial public
offering and September 30, 1999 secondary offering failed
to disclose certain alleged improper actions by the underwriters
for the offerings. The consolidated, amended complaint alleges
claims against us and those of our officers and directors named
in the complaint under Sections 11 and 15 of the Securities
Act of 1933, and under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. Other lawsuits have been filed
making similar allegations regarding the public offerings of
more than 300 other companies. All of these various
consolidated cases have been coordinated for pretrial purposes
as
In re. Initial Public Offering Securities Litigation
,
Civil Action No. 21-MC-92. In October 2002, the officers
and directors were dismissed without prejudice. The issuer
defendants filed a coordinated motion to dismiss these lawsuits
in July 2002, which the Court granted in part and denied in part
in an order dated February 19, 2003. The Court declined to
dismiss the Section 11 and Section 10(b) and
Rule 10b-5 claims against F5 Networks. In June 2003, a
proposal was made for the settlement and release of claims
against the issuer defendants, including us, and their directors
and officers in exchange for a guaranteed recovery to be paid by
the issuer defendants insurance carriers and an assignment
of certain claims against the underwriters. The settlement is
subject to a number of conditions, including approval by the
proposed settling parties and the Court. If the settlement does
not occur, and litigation against us continues, we believe we
have meritorious defenses and intend to defend the case
vigorously. Securities class action litigation could result in
substantial costs and divert our managements attention and
resources. Due to the inherent uncertainties of litigation, we
cannot accurately predict the ultimate outcome of the
litigation, and any unfavorable outcome could have a material
adverse impact on our business, financial condition and
operating results.
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In July 2003, NetScreen filed a lawsuit in the
Superior Court of Santa Clara County, California against uRoam.
The lawsuit alleges that uRoam breached a contract with
NetScreen arising from a letter of intent for the proposed
acquisition of uRoam by NetScreen. We are not a party to this
litigation nor have we been threatened with litigation by
NetScreen. However, since we acquired substantially all of the
assets of uRoam in July 2003, we cannot assure you that we will
not become involved in related litigation in the future nor can
we predict the effect that such involvement could have on our
financial condition.
We are not aware of any additional pending legal
proceedings against us that, individually or in the aggregate,
would have a material adverse effect on our business, operating
results or financial condition. We may in the future be party to
litigation arising in the course of our business, including
claims that we allegedly infringe third-party trademarks and
other intellectual property rights. Such claims, even if not
meritorious, could result in the expenditure of significant
financial and managerial resources.
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Table of Contents
Table of Contents
Table of Contents
MANAGEMENT
The following table sets forth certain information with respect to our executive officers and directors as of November 11, 2003:
Name | Age | Position | ||||
|
|
|
||||
John McAdam
|
52 | President, Chief Executive Officer and Director | ||||
Steven B. Coburn
|
50 | Senior Vice President of Finance and Chief Financial Officer | ||||
Edward J. Eames
|
45 | Senior Vice President of Business Operations and Vice President of Global Services | ||||
M. Thomas Hull
|
44 | Senior Vice President of Worldwide Sales | ||||
Jeff Pancottine
|
43 | Senior Vice President of Marketing and Business Development | ||||
Joann M. Reiter
|
46 | Vice President, General Counsel and Corporate Secretary | ||||
Jeff Stockdale
|
43 | Senior Vice President of Product Development | ||||
Glenn T. Edens(1)
|
50 | Director | ||||
Keith D. Grinstein(1)(3)
|
43 | Director | ||||
Karl D. Guelich(1)(2)
|
61 | Chairman of the Board of Directors | ||||
Alan J. Higginson(2)(3)
|
56 | Director | ||||
Jeffrey S. Hussey
|
42 | Director | ||||
Rich Malone(2)(3)
|
55 | Director |
(1) | Member of the Audit Committee. |
(2) | Member of the Compensation Committee. |
(3) | Member of the Corporate Governance Committee. |
John McAdam has served as our President, Chief Executive Officer and a director since July 2000. Prior to joining us, Mr. McAdam served as General Manager of the Web server sales business at International Business Machines Corporation from September 1999 to July 2000. From January 1995 until August 1999, Mr. McAdam served as the President and Chief Operating Officer of Sequent Computer Systems, Inc., a manufacturer of high-end open systems, which was sold to International Business Machines Corporation in September 1999. Mr. McAdam holds a B.S. in Computer Science from the University of Glasgow, Scotland.
Steven B. Coburn has served as our Senior Vice President of Finance and Chief Financial Officer since May 2001. Prior to joining us, Mr. Coburn worked at TeleTech Holdings, Inc., a customer relationship management services company as Chief Financial Officer and Senior Vice-President from October 1995 until August 1999 where he oversaw the finance, business development, legal, and investor relations functions of the company. Mr. Coburn holds a B.A. in Accounting from Southern Illinois University.
Edward J. Eames has served as our Senior Vice President of Business Operations and Vice President of Global Services since January 2001 and as our Vice President of Professional Services from October 2000 to January 2001. From September 1999 to October 2000, Mr. Eames served as Vice President of e-Business Services for International Business Machines Corporation. From June 1992 to September 1999, Mr. Eames served as the European Services Director and the Worldwide Vice President of Customer Service for Sequent Computer Systems, Inc., a manufacturer of high-end open systems. Mr. Eames holds a Higher National Diploma in Business Studies from Bristol Polytechnic and in 1994 completed the Senior Executive Program at the London Business School.
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M. Thomas Hull joined us as our Senior Vice President of Worldwide Sales on October 20, 2003. Prior to joining us, Mr. Hull serviced as President and Chief Executive Officer of Picture IQ Corporation from April 2001 to October 2003. From September 1998 through April 1999, he served as Vice President of Corporate Sales for Visio Corporation. From April 1999 to January 2000, he served as Senior Vice President of Worldwide Sales for Visio Corporation through its acquisition by Microsoft Corporation in January 2000. From January 2000 through July 2000, Mr. Hull continued to oversee sales of the Visio product set for Microsoft Corporation. He holds a B.S. in Electrical Engineering from the University of Washington.
Jeff Pancottine has served as our Senior Vice President of Marketing and Business Development since October 2000. Prior to joining us, Mr. Pancottine served as Senior Vice President of Sales and Marketing for the Media Systems Division of Real Networks, Inc., from April 2000 to October 2000. Prior to that, Mr. Pancottine was the Vice President of Business Marketing at Intel Corporation, from November 1999 to April 2000. From June 1997 to November 1999, Mr. Pancottine held the position of Vice President of Global Marketing at Sequent Computer Systems, Inc. Jeff holds a Master of Engineering in Computer Science from Cornell University, and a B.S. in Computer Science from the University of California at Riverside.
Joann M. Reiter has served as our Vice President and General Counsel since April 2000, and as General Counsel from April 1998 through April 2000. She has served as our Corporate Secretary since June 1999. Prior to joining us, Ms. Reiter served as Director of Operations for Excell Data Corporation, an information technology consulting and system integration services company from September 1997 through March 1998. From September 1992 through September 1997, she served as Director of Legal Services and Business Development for CellPro, Inc. a medical device manufacturer. She holds a J.D. from the University of Washington and is a member of the Washington State Bar Association.
Jeff Stockdale has served as our Senior Vice President of Product Development since June 2003 and as Vice President of Platform Technology from September 2001 to June 2003. Mr. Stockdale served as our Director of Platform Technology from May 1999 to September 2001. Prior to joining us, Mr. Stockdale served as Senior Engineering Manager for Adaptec Inc. (formerly Cogent Data Technologies Inc.), an Ethernet networking company, from 1993 to 1999. Mr. Stockdale holds a B.S. in Electrical Engineering from Washington State University.
Glenn T. Edens was appointed as one of our directors in August 2003. He is currently Vice President, Research at Sun Microsystems, Inc. From May 2001 to September 2002, Mr. Edens served as Vice President and Chief of Technology Strategy for the Hewlett Packard Company. From November 1998 to June 2001, he served as President of AT&T Strategic Ventures and as Vice President of Broadband Technology, for AT&T Laboratories. From October 1992 to November 1998, he served as General Manager of the Home Systems Division for Interval Research Corporation. He attended California State University at Kellogg (now California State Polytechnic University, Pomona), with an emphasis on architecture and electrical engineering.
Keith D. Grinstein has served as one of our directors since December 1999. He also serves as board chair for Coinstar, Inc., a coin counting machine company, and as lead outside director for Nextera, Inc. an economics-consulting firm. Mr. Grinstein is a partner of Second Avenue Partners, LLC, a venture capital fund. Mr. Grinsteins past experience includes serving as President, Chief Executive Officer and Vice Chair of Nextel International Inc., and as President and Chief Executive Officer of the Aviation Communications Division of AT&T Wireless Services Inc. Mr. Grinstein holds a B.A. from Yale University and a J.D. from Georgetown University.
Karl D. Guelich has served as Chairman of the Board of Directors since January 2003 and as one of our directors since June 1999. Mr. Guelich has been in private practice as a certified public accountant since his retirement from Ernst & Young LLP in 1993, where he served as the Area Managing Partner for the Pacific Northwest offices headquartered in Seattle from October 1986 to November 1992. Mr. Guelich holds a B.S. in Accounting from Arizona State University.
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Alan J. Higginson has served as one of our directors since May 1996. Mr. Higginson has been the President and Chief Executive Officer of Hubspan, Inc., an e-business infrastructure provider, since August 2001. From November 1995 to November 1998, Mr. Higginson served as President of Atrieva Corporation, a provider of advanced data backup and retrieval technology. Mr. Higginson holds a B.S. in Commerce and an M.B.A. from the University of Santa Clara.
Jeffrey S. Hussey co-founded the Company in February 1996 and has served as one of our directors since that time. From February 1996 through August 2002, Mr. Hussey was also Chairman of the Board, and from February 1996 to July 2000, our Chief Executive Officer and President. He served as our Chief Strategist from July 2000 through October 2001 and as our treasurer from February 1996 to March 1999. Mr. Hussey holds a B.A. in Finance from Seattle Pacific University and an M.B.A. from the University of Washington.
Rich Malone was appointed as one of our directors in August 2003. Mr. Malone has been the Chief Information Officer of Edward Jones Investments Inc. since 1979, when he joined Edward Jones Investments as a General Principal. In 1985, he became a member of the management committee of Edward Jones Investments. Mr. Malone is currently a member of the BITS Advisory Group, the Xerox Executive Advisory Forum and serves on the Technology Advisory Committee at Arizona State University.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We have entered into indemnification agreements with our directors and certain officers for the indemnification of and advancement of expenses to these persons to the fullest extent permitted by law. We also intend to enter into these agreements with our future directors and certain future officers.
In October 2000, we extended a loan to one of our executive officers and his wife, in the principal amount of $350,000, in order to facilitate the purchase of a residence in the Seattle area. On March 15, 2002, payments due under the note were extended for a period of one year, as allowed per the terms of the note. This loan was evidenced by a promissory note, the principal of which was payable in three equal installments, together with accrued interest, on March 31, 2002, March 31, 2003, and March 31, 2004, or immediately upon the sale of the residence or termination of such officers employment. Interest accrued on the loan at the rate of 6% per annum. The balance of the loan totaled $240,354 at September 30, 2003. The residence was sold in October 2003 and the loan was repaid in full on October 20, 2003.
We believe that the foregoing agreements are in our best interest and were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. All future transactions between us and any of our officers, directors or principal shareholders will be approved in advance by our Audit Committee.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information
regarding the beneficial ownership of our common stock as of
November 10, 2003 by (a) each person known to us to
own beneficially more than 5% of outstanding shares of our
common stock on November 10, 2003, (b) each director
and nominee for director of F5 Networks, (c) our Chief
Executive Officer and our four other most highly compensated
executive officers, together with one executive officer who
resigned during fiscal year 2003 and (d) all directors and
executive officers as a group. The information in this table is
based solely on statements in filings with the SEC or other
reliable information.
Number of
Shares of
Common Stock
Percent of
Beneficially
Common Stock
Name and Address(1)
Owned(2)
Outstanding(2)
1,747,681
6.3
%
One Mellon Center
Pittsburgh, Pennsylvania 15258
1,470,800
5.3
%
114 West 47th Street, Suite 1926
New York, NY 10036
720,610
2.6
%
205,832
*
235,662
*
221,471
*
112,775
*
1,860
*
42,500
*
2,210,727
8.0
%
121,500
*
58,500
*
15,000
*
15,000
*
4,054,973
14.6
%
* | less than 1%. |
(1) | Unless otherwise indicated, the address of each of the named individuals is c/o F5 Networks, Inc., 401 Elliott Avenue West, Seattle, Washington 98119. | |
(2) | Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power, or of which a person has the right to acquire ownership within 60 days after November 10, 2003. Except as otherwise noted, each person or entity has sole voting and investment power with respect to the shares shown. | |
(3) | The holding shown is as reported by Mellon Financial Corporation in a Schedule 13G filed on January 21, 2003 as the aggregate amount beneficially owned by each reporting person. Mellon Financial Corporation has reported sole voting power over 1,428,381 shares, shared voting power over 305,500 shares, sole dispositive power over 1,440,281 shares, and shared dispositive power over 307,400 shares. | |
(4) | The holding shown is as reported by Kern Capital Management in a Schedule 13G/A filed on April 10, 2003. Kern Capital Management has reported sole voting and dispositive power over all 1,470,800 shares. |
S-45
(5) | Includes 649,999 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. | |
(6) | Includes 205,832 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. | |
(7) | Includes 234,799 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. | |
(8) | Includes 219,962 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. | |
(9) | Includes 102,916 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. |
(10) | Mr. Goldman resigned in August 2003. |
(11) | Includes 42,500 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. |
(12) | Does not include 350,000 shares held by Brian Dixon as trustee of the Hussey Family Trust fbo Mr. Husseys minor child. Mr. Hussey disclaims any beneficial ownership of the shares held by the trust. Includes 93,333 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. |
(13) | Includes 121,500 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. |
(14) | Includes 52,500 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. |
(15) | Includes 15,000 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. |
(16) | Includes 15,000 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. |
(17) | Includes 1,858,477 shares issuable upon exercise of options exercisable within 60 days of November 10, 2003. |
S-46
UNDERWRITING
Citigroup Global Markets Inc., Lehman Brothers
Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives of the underwriters
named below. Subject to the terms and conditions stated in the
underwriting agreement dated the date of this prospectus
supplement, each underwriter named below has agreed to purchase,
and we have agreed to sell to that underwriter, the number of
shares set forth opposite the underwriters name.
Number
Underwriting
of Shares
2,250,000
1,125,000
900,000
75,000
75,000
75,000
4,500,000
The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the shares (other than those covered by the over-allotment option described below) if they purchase any of the shares.
The underwriters propose to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to dealers at the public offering price less a concession not to exceed $0.6975 per share. The underwriters may allow, and dealers may reallow, a concession not to exceed $0.10 per share on sales to other dealers. If all of the shares are not sold at the initial offering price, the representatives may change the public offering price and the other selling terms.
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 675,000 additional shares of common stock at the public offering price less the underwriting discount. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional shares approximately proportionate to that underwriters initial purchase commitment.
We, our officers and our directors have agreed that, for a period of 90 days from the date of this prospectus supplement, we and they will not, without the prior written consent of Citigroup, dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock. However, those of our officers and directors with existing trading plans under SEC Rule 10b5-1 may resume sales under such existing plans on February 1, 2004. Citigroup in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.
Each underwriter has represented, warranted and agreed that:
| it has not offered or sold and, prior to the expiry of a period of six months from the closing date, will not offer or sell any shares included in this offering to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; | |
| it has only communicated and caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the |
S-47
meaning of section 21 of the Financial Services and Markets Act 2000, or FSMA) received by it in connection with the issue or sale of any shares included in this offering in circumstances in which section 21(1) of the FSMA does not apply to us; | ||
| it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares included in this offering in, from or otherwise involving the United Kingdom; and | |
| the offer in The Netherlands of the shares included in this offering is exclusively limited to persons who trade or invest in securities in the conduct of a profession or business (which include banks, stockbrokers, insurance companies, pension funds, other institutional investors and finance companies and treasury departments of large enterprises). |
Our common stock is quoted on the Nasdaq National Market under the symbol FFIV.
The following table shows the underwriting
discounts and commissions that we are to pay to the underwriters
in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the
underwriters option to purchase additional shares of
common stock.
Paid by F5 Networks, Inc.
No Exercise
Full Exercise
$
1.1625
$
1.1625
$
5,231,250
$
6,015,938
In connection with this offering, Citigroup on behalf of the underwriters, may purchase and sell shares of common stock in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of common stock in excess of the number of shares to be purchased by the underwriters in this offering, which creates a syndicate short position. Covered short sales are sales of shares made in an amount up to the number of shares represented by the underwriters over-allotment option. In determining the source of shares to close out the covered syndicate short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Transactions to close out the covered syndicate short position involve either purchases of the common stock in the open market after the distribution has been completed or the exercise of the over-allotment option. The underwriters may also make naked short sales of shares in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in this offering. Stabilizing transactions consist of bids for or purchases of shares in the open market while this offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when Citigroup repurchases shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a decline in the market price of the common stock. They may also cause the price of the common stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the Nasdaq National Market or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.
In addition, in connection with this offering, some of the underwriters (and selling group members) may engage in passive market making transactions in the common stock on the Nasdaq National Market, prior to the pricing and completion of this offering. Passive market making consists of displaying bids on the Nasdaq National Market no higher than the bid prices of independent market makers and making
S-48
We estimate that the total expenses of this offering, excluding the underwriting discount, will be approximately $490,125.
Some of the underwriters have performed investment banking and advisory services for us from time to time for which they have received customary fees and expenses. The underwriters may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business.
A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. The representatives will allocate shares to underwriters that may make Internet distributions on the same basis as other allocations. In addition, shares may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make because of any of those liabilities.
LEGAL MATTERS
Heller Ehrman White & McAuliffe LLP, Seattle, Washington, will pass upon the validity of the common stock offered by this prospectus supplement for us. Certain matters relating to this offering will be passed on for the underwriters by Simpson Thacher & Bartlett LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements of F5 Networks, Inc. as of September 30, 2003 and 2002 and for each of the three years in the period ended September 30, 2003 included in this prospectus supplement and the related consolidated financial statement schedule of F5 Networks, Inc. incorporated in this prospectus supplement by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 2003 have been so included and incorporated by reference in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, as well as registration and proxy statements and other information, with the SEC. These documents may be read and copied at the SECS Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can get further information about the Public Reference Room by calling 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, registration statements and other information regarding registrants like us that file electronically with the SEC.
This prospectus supplement is part of a registration statement on Form S-3 filed by us with the SEC under the Securities Act of 1933, as amended. As permitted by the SEC, this prospectus supplement does not contain all the information in the registration statement filed with the SEC. For a more complete understanding of this offering, you should refer to the complete registration statement on Form S-3 that may be obtained from the locations described above. Statements contained in this prospectus supplement
S-49
INCORPORATION BY REFERENCE
The SEC allows us to incorporate by reference the information we file with it, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus supplement, and certain information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any additional documents filed by us with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, until we complete our offering of the securities (other than current reports on Form 8-K containing Regulation FD disclosures furnished under Item 9 or Results of Operations and Financial Condition disclosure furnished under Item 12 and exhibits relating to such disclosures, unless otherwise specifically stated in such current report on Form 8-K):
| our current report on Form 8-K dated, and filed with the SEC on, October 30, 2003; | |
| our annual report on Form 10-K for the fiscal year ended September 30, 2003, as filed with the SEC on October 30, 2003; and | |
| the description of our common stock contained in our registration statement on Form 8-A, as filed with the SEC on May 11, 1999 under Section 12(g) of the Exchange Act, including any amendments or reports filed for the purpose of updating that description. |
Documents incorporated by reference, excluding exhibits, are available from us without charge. You may obtain copies of documents incorporated by reference by requesting them in writing from F5 Networks, Inc., 401 Elliott Avenue West, Seattle, Washington 98119, Attention Investor Relations Department, or by calling (206) 272-5555. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are also available free of charge on our website www.f5.com as soon as reasonably practicable after such material is electronically filed with the SEC.
S-50
INDEX TO FINANCIAL STATEMENTS
F5 Networks, Inc.
Index to Consolidated Financial Statements
Page | ||||
|
||||
Consolidated Financial Statements | ||||
Report of Independent Auditors
|
F-2 | |||
Consolidated Balance Sheets
|
F-3 | |||
Consolidated Statements of Operations
|
F-4 | |||
Consolidated Statements of Shareholders
Equity
|
F-5 | |||
Consolidated Statements of Cash Flows
|
F-6 | |||
Notes to Consolidated Financial Statements
|
F-7 |
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of F5 Networks,
Inc. and its subsidiaries at September 30, 2003 and 2002,
and the results of their operations and their cash flows for
each of the three years in the period ended September 30,
2003 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
F-2
Table of Contents
F5 NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
2003
2002
(In thousands)
ASSETS
$
10,351
$
20,801
34,527
59,532
19,325
20,404
762
349
4,779
4,713
69,744
105,799
6,000
6,000
10,079
12,211
34,132
1,346
24,188
4,030
933
$
148,173
$
126,289
LIABILITIES AND SHAREHOLDERS
EQUITY
$
3,714
$
3,685
13,148
13,546
19,147
14,058
36,009
31,289
1,584
1,315
151
1,735
1,315
141,709
128,876
(10
)
(93
)
195
454
(31,465
)
(35,552
)
110,429
93,685
$
148,173
$
126,289
The accompanying notes are an integral part of these consolidated financial statements.
F-3
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
Years Ended September 30,
2003
2002
2001
(In thousands, except per share data)
$
84,197
$
82,566
$
78,628
31,698
25,700
28,739
115,895
108,266
107,367
17,837
20,241
33,240
9,068
10,238
12,265
26,905
30,479
45,505
88,990
77,787
61,862
53,458
50,581
50,767
19,246
17,985
17,435
12,014
15,045
18,776
3,274
975
83
443
2,625
84,801
87,328
90,578
4,189
(9,541
)
(28,716
)
751
1,420
2,021
4,940
(8,121
)
(26,695
)
853
489
4,095
$
4,087
$
(8,610
)
$
(30,790
)
$
0.15
$
(0.34
)
$
(1.36
)
26,453
25,323
22,644
$
0.14
$
(0.34
)
$
(1.36
)
28,220
25,323
22,644
The accompanying notes are an integral part of these consolidated financial statements.
F-4
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
Notes
Accumulated
Common Stock
Receivable
Other
Total
From
Unearned
Comprehensive
Accumulated
Shareholders
Shares
Amount
Shareholders
Compensation
Income/(Loss)
Deficit
Equity
(In thousands)
21,613
$
87,419
$
(469
)
$
(3,061
)
$
(52
)
$
3,848
$
87,685
608
642
642
9
154
1,667
1,667
(30
)
(1,082
)
(1,082
)
2,466
34,928
34,928
188
188
(56
)
(281
)
281
100
(100
)
2,625
2,625
(30,790
)
(27
)
652
(30,165
)
24,764
123,393
(536
)
573
(26,942
)
96,488
765
3,752
3,752
201
1,731
1,731
443
443
(8,610
)
(285
)
166
(8,729
)
25,730
128,876
(93
)
454
(35,552
)
93,685
1,424
10,827
10,827
249
2,006
2,006
83
83
4,087
(161
)
(98
)
3,828
27,403
$
141,709
$
$
(10
)
$
195
$
(31,465
)
$
110,429
The accompanying notes are an integral part of these consolidated financial statements
F-5
F5 NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years Ended September 30,
2003
2002
2001
(In thousands)
$
4,087
$
(8,610
)
$
(30,790
)
2,771
975
1,090
345
325
4,019
(14
)
1
(92
)
232
74
111
83
443
2,625
1,148
6,181
15,310
5,162
5,612
5,348
3,398
354
(4,595
)
423
(408
)
1,899
790
(54
)
1,091
(5,422
)
(512
)
51
(728
)
(320
)
154
(3,018
)
4,852
3,018
(5,127
)
14,610
9,505
(11,833
)
(157,834
)
(104,975
)
(81,464
)
149,724
95,481
64,839
851
14
30
217
(27,373
)
(2,584
)
(3,199
)
(9,152
)
(38,053
)
(12,663
)
(24,709
)
34,928
12,833
5,483
2,309
188
(1,082
)
12,833
5,483
36,343
(10,610
)
2,325
(199
)
160
155
(16
)
20,801
18,321
18,536
$
10,351
$
20,801
$
18,321
$
$
$
(281
)
150
(50
)
290
903
167
The accompanying notes are an integral part of these consolidated financial statements.
F-6
F5 NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1. Summary of
Significant Accounting Policies
The Company
F5 Networks, Inc. (the Company) provides
integrated products and services to manage, control and optimize
Internet traffic. Our core products, the BIG-IP Controller,
3-DNS Controller, and the BIG-IP Link Controller, help manage
traffic to servers and network devices in a way that maximizes
availability and throughput. Our FirePass family of network
server appliances provide secure user access to corporate
networks and individual applications via any standard Web
browser. Our unique iControl architecture integrates our
products and also allows our customers and other vendors to
integrate them with third party products, including enterprise
applications. As components of an integrated solution, our
products address many elements required for successful Internet
and intranet business applications, high availability, high
performance, intelligent load balancing, fault tolerance,
streamlined manageability, remote access to corporate networks,
and network and application security. By enhancing Internet
performance and availability, our solutions enable our customers
and partners to maximize the use of the Internet in their
business.
Certain Risks and Uncertainties
The Companys products and services are
concentrated in highly competitive markets characterized by
rapid technological advances, frequent changes in customer
requirements and evolving regulatory requirements and industry
standards. Failure to anticipate or respond adequately to
technological advances, changes in customer requirements and
changes in regulatory requirements or industry standards could
have a material adverse effect on the Companys business
and operating results. Additionally, certain other factors could
affect the Companys future operating results and cause
actual results to differ materially from expectations, including
but not limited to, dependence on a third party manufacturer,
difficulties in managing growth, difficulties in attracting and
retaining qualified personnel, dependence on key personnel,
enforcement of intellectual property rights, the lengthening of
sales cycles and an uneven pattern of quarterly results.
Accounting Principles
The Companys consolidated financial
statements and accompanying notes are prepared on the accrual
basis of accounting in accordance with generally accepted
accounting principles in the United States of America.
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities as
of the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Estimates are used in accounting for revenue recognition,
reserves for doubtful accounts, product returns, obsolete and
excess inventory, warranties, valuation allowance on deferred
tax assets and purchase price allocations. Actual results could
differ from those estimates.
F-7
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid
investments with purchased maturities of three months or less to
be cash equivalents. The Company invests its cash and cash
equivalents in deposits with four major financial institutions,
which, at times, exceed federally insured limits. The Company
has not experienced any losses on its cash and cash equivalents.
Investments
The Company classifies its investment securities
as available for sale. Investment securities, consisting of
corporate and municipal bonds and notes and United States
government securities, are reported at fair value with the
related unrealized gains and losses included as a component of
shareholders equity. Realized gains and losses and
declines in value of securities judged to be other than
temporary are included in other income (expense). The cost of
investments for purposes of computing realized and unrealized
gains and losses is based on the specific identification method.
Investments in securities with maturities of less than one year
or where managements intent is to use the investments to
fund current operations are classified as short-term
investments. Investments with maturities of greater than one
year are classified as long-term investments.
Concentration of Credit Risk
The Company extends credit to customers and is
therefore subject to credit risk. The Company performs initial
and ongoing credit evaluations of its customers financial
condition and does not require collateral. An allowance for
doubtful accounts, in an amount based on historical levels, is
recorded to account for potential bad debts. Estimates are used
in determining the allowance for doubtful accounts and are based
on a percentage of accounts receivable by aging category. In
determining these percentages, the Company evaluates historical
write-offs, and current trends in customer credit quality, as
well as changes in credit policies.
The Company maintains its cash and investment
balances with high credit quality financial institutions.
Fair Value of Financial Instruments
For certain financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, recorded amounts approximate fair market
value, due to the short maturities of these instruments.
Short-term and long-term investments are recorded
at fair value as the underlying securities are classified as
available for sale and marked-to-market at each reporting period.
Inventories
The Company outsources the manufacturing of its
pre-configured hardware platforms to a contract manufacturer,
who assembles each product to the Companys specifications.
As protection against component shortages and to provide
replacement parts for its service teams, the Company also stocks
limited supplies of certain key product components. Inventories
consist of hardware and related component parts and are recorded
at the lower of cost or market (as determined by the first-in,
first-out method).
F-8
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted Cash
Restricted cash represents an escrow account
established in connection with a lease agreement for the
Companys corporate headquarters. Under the terms of the
lease, a $6.0 million certificate of deposit is required
through November 2012, unless the lease is terminated prior to
that date.
Property and Equipment
Property and equipment is stated at cost.
Depreciation of property and equipment and amortization of
capital leases are provided using the straight-line method over
the estimated useful lives of the assets, ranging from two to
five years. Leasehold improvements are amortized over the lesser
of the lease term or the estimated useful life of the
improvements. The cost of normal maintenance and repairs is
charged to expense as incurred and expenditures for major
improvements are capitalized at cost. Gains or losses on the
disposition of assets are reflected in the results of operations
at the time of disposal.
Other Assets
Other assets primarily consist of software
development cost and acquired technology. Software development
costs are charged to research and development expense until
technological feasibility is established. Thereafter, until the
product is released for sale, software development costs are
capitalized and reported at the lower of unamortized cost or net
realizable value of each product. The establishment of
technological feasibility and the on-going assessment of
recoverability of costs require considerable judgment by the
Company with respect to certain internal and external factors,
including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in hardware and
software technology. The Company amortizes capitalized software
development costs using the straight-line method over the
estimated economic life of the product, generally three years.
During the years ended September 30, 2003 and 2002, the
Company capitalized $474,000 and $392,000 of software
development costs, respectively. Related amortization costs of
$298,000 and $225,000 were recorded during the fiscal years 2003
and 2002, respectively.
Acquired technology is recorded at cost and
amortized over its estimated useful life of five years. Acquired
technology of $3.0 million was recorded in connection with
the acquisition of uRoam, Inc. in July 2003. Amortization
expense totaled approximately $100,000 for the year ended
September 30, 2003.
Goodwill
Goodwill represents the excess purchase price
over the estimated fair value of net assets acquired as of the
acquisition date. The Company has adopted the requirements of
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 142 requires
goodwill to be tested for impairment on an annual basis and
between annual tests in certain circumstances, and written down
when impaired. Goodwill of $24.2 million was recorded in
connection with the acquisition of uRoam, Inc. in July 2003.
There was no impairment of goodwill in fiscal year 2003.
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived
assets whenever events or changes in business circumstances
indicate that the carrying amount of an asset may not be
recoverable. When such events occur, management determines
whether there has been impairment by comparing the anticipated
undiscounted net future cash flows to the related assets
carrying value. If impairment exists, the asset is written down
to its estimated fair value.
F-9
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue Recognition
The Company recognizes revenue in accordance with
the guidance provided under Statement of Position
(SOP) No. 97-2, Software Revenue
Recognition, and SOP No. 98-9 Modification
of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions, Statement of Financial
Accounting Standards (SFAS) No. 48, Revenue
Recognition When Right of Return Exists, and SEC Staff
Accounting Bulleting (SAB) No. 101, Revenue
Recognition in Financial Statements.
The Company sells products through resellers,
original equipment manufacturers (OEMs) and other channel
partners, as well as directly to end users. The Company
recognizes product revenue upon shipment, net of estimated
returns, provided that collection is determined to be probable
and no significant obligations remain. Product revenues from OEM
agreements are recognized based on reporting of sales from the
OEM partner.
Whenever a software license, hardware,
installation and post-contract customer support
(PCS) elements are combined into a package with a single
bundled price, a portion of the sales price is
allocated to each element of the bundled package based on their
respective fair values as determined when the individual
elements are sold separately. Revenues from the license of
software are recognized when the software has been shipped and
the customer is obligated to pay for the software. When rights
of return are present and we cannot estimate returns, we
recognize revenue when such rights of return lapse. Revenues for
PCS are recognized on a straight-line basis over the service
contract term. PCS includes rights to upgrades, when and if
available, a limited period of telephone support, updates, and
bug fixes. Installation revenue is recognized when the product
has been installed at the customers site. Consulting
services are customarily billed at fixed rates, plus
out-of-pocket expenses, and revenues are recognized when the
consulting has been completed. Training revenue is recognized
when the training has been completed.
Payment terms to domestic customers are generally
net 30 days. Payment terms to international customers range
from net 30 to 90 days based on normal and customary trade
practices in the individual markets. The Company has offered
extended payment terms to certain customers, in which case,
revenue is recognized when payments become due.
Guarantees and Product Warranties
In the normal course of business to facilitate
sales of its products, the Company indemnifies other parties,
including customers, resellers, lessors, and parties to other
transactions with the Company, with respect to certain matters.
The Company has agreed to hold the other party harmless against
losses arising from a breach of representations or covenants, or
out of intellectual property infringement or other claims made
against certain parties. These agreements may limit the time
within which an indemnification claim can be made and the amount
of the claim. In addition, the Company has entered into
indemnification agreements with its officers and directors, and
the Companys bylaws contain similar indemnification
obligations to the Companys agents. It is not possible to
determine the maximum potential amount under these
indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances
involved in each particular agreement. Historically, payments
made by the Company under these agreements have not had a
material impact on the Companys operating results or
financial position.
The Company generally offers warranties of
90 days for hardware and one year for software, with the
option of purchasing additional warranty coverage in increments
of one year. The Company accrues for warranty costs as part of
its cost of sales based on associated material product costs and
technical support labor costs. During the years ended
September 30, 2003, 2002 and 2001 warranty expense was
F-10
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0.3 million, $1.6 million and
$0.4 million, respectively. The following table summarizes
the activity related to product warranties during fiscal years
2003 and 2002 (in thousands):
Research and Development
Research and development expenses consist of
salaries and related benefits of product development personnel
and an allocation of facilities and depreciation expense.
Research and development expenses are reflected in the statement
of operations as incurred.
Advertising
Advertising costs are expensed as incurred. The
Company incurred $1.0 million, $1.5 million and
$1.5 million in advertising costs during the fiscal years
2003, 2002 and 2001, respectively.
Income Taxes
The Company accounts for income taxes under the
liability method of accounting. Under the liability method,
deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities
at enacted tax rates in effect in the year in which the
differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
estimated amounts expected to be realized.
Foreign Currency
The financial statements of all majority-owned
subsidiaries have been translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 52 Foreign Currency Translation.
Accordingly, all assets and liabilities of the subsidiaries are
translated at year-end exchange rates and all revenues and
expenses are translated at the average exchange rate for the
period presented. Translation gains and losses are reported as
comprehensive income (loss) as a separate component of
shareholders equity.
Foreign currency transaction gains and losses are
a result of the effect of exchange rate changes on transactions
denominated in currencies other than the functional currency,
including US dollars. Gains and losses on those foreign
currency transactions are included in determining net income or
loss for the period of exchange. For the fiscal year ended
September 30, 2003, a transaction loss of $544,000 was
realized, with a transaction gain of $15,000 realized in fiscal
year 2002. A transaction loss of $139,000 was charged to
operations for the fiscal year ended September 30, 2001.
Segments
The Company complies with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosure about Segments of an Enterprise and Related
Information, which establishes annual and interim
reporting standards for an enterprises operating segments
and related
F-11
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
disclosures about its products, services,
geographic areas and major customers. Management has determined
that the Company operates in one segment.
Stock-Based Compensation
The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to
Employees, FASB Interpretation No. 44
(FIN No. 44), Accounting for Certain
Transactions Involving Stock Compensation, and related
interpretations and complies with the disclosure provisions of
Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), Accounting for Stock-Based
Compensation. Under APB No. 25, compensation expense
is based on the difference, if any, on the date of the grant,
between the deemed fair value of the Companys stock and
the exercise price of the option. The unearned compensation is
being amortized in accordance with Financial Accounting
Standards Board Interpretation No. 28 on an accelerated
basis over the vesting period of the individual options. The
Company accounts for equity instruments issued to non-employees
in accordance with the provisions of SFAS No. 123 and
related interpretations.
The pro forma effect on the Companys net
income (loss) and net income (loss) per share of applying SFAS
No. 123, utilizing the assumptions described in
note 10 Shareholders Equity, would have
been as follows (in thousands, except per share data):
Earnings per Share
Basic net income (loss) per share is
computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed by dividing
net income (loss) by the weighted average number of common and
dilutive common stock equivalent shares outstanding during the
period.
F-12
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of
basic and diluted net income (loss) per share (in
thousands, except per share data).
Approximately 2.6 million of common shares
potentially issuable from stock options for the year ended
September 30, 2003 are excluded from the calculation of
diluted earnings per share because the effect was antidilutive.
For fiscal years 2002 and 2001, in which the Company incurred a
net loss, all common stock equivalent shares are excluded from
the calculation as their impact would have been antidilutive.
Recent Accounting Pronouncements
In May 2003, FASB issued Statement of Financial
Accounting Standard No. 150 Accounting for Certain
Financial Instruments with Characteristics of Both Liability and
Equity (SFAS No. 150). SFAS No. 150 establishes
standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003.
The adoption of this standard did not have an impact on our
consolidated financial statements.
In April 2003, FASB issued Statement of Financial
Accounting Standards No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (SFAS
No. 149), which is generally effective for contracts
entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. SFAS
No. 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a
derivative as discussed in Statement of Financial Accounting
Standards No. 133, when a derivative contains a financing
component, amends the definition of an underlying to
conform it to the language used in FASB interpretation
No. 45, Guarantor Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others and amends certain other existing
pronouncements. The adoption of this standard did not have an
impact on our consolidated financial statements.
In January 2003, FASB issued Interpretation
No. 46 (FIN No. 46), Consolidation of
Variable Interest Entities, which addresses consolidation
by business enterprises of variable interest entities that
either: (1) do not have sufficient equity investment at
risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) the
Company will hold a significant variable interest in, or have
significant involvement with, an existing variable interest
entity. The adoption of this interpretation did not have an
impact on our consolidated financial statements.
F-13
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In November 2002, FASB issued Interpretation
No. 45 (FIN No. 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which
addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees. FIN No. 45 also requires the
recognition of a liability by a guarantor at the inception of
certain guarantees that are entered into or modified after
December 31, 2002. The additional disclosures required by
FIN No. 45 have been included in the notes to our
consolidated financial statements.
Reclassifications
Certain reclassifications have been made to prior
year balances to conform to the current year presentation. These
reclassifications had no impact on previously reported net loss,
shareholders equity or cash flows.
2. Short-Term and
Long-Term Investments
Short-term investments consist of the following
(in thousands):
Long-term investments consist of the following
(in thousands):
F-14
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fixed Maturity by Maturity Date
The cost or amortized cost and fair value of
fixed maturities at September 30, 2003, by contractual
years-to-maturity, are presented below (in thousands):
In December 2001, the Company purchased
approximately 16 million shares of common stock of Artel
Solutions Group Holdings Limited, or Artel, which represented an
approximate 1% ownership percentage of that company. The Company
sold its investment in Artel and recorded a loss on disposition
of $263,000 during the fourth quarter of fiscal year 2003.
Inventories consist of the following (in
thousands):
The Company is contractually obligated to
purchase component inventory that its contract manufacturer
procures in accordance with a forecast, unless the Company gives
notice of order cancellation within applicable lead times. For
any completed product inventory carried by the contract
manufacturer beyond 30 days, the Company will be charged a
monthly carrying fee of 1.5%. Alternatively, the Company has the
option to purchase inventory held by the contractor manufacturer
beyond 30 days to avoid incurring related carrying charges.
As of September 30, 2003, the Company was committed to
purchase approximately $3.3 million of such inventory
within the following quarter.
F-15
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other current assets consist of the following (in
thousands):
Property and equipment consist of the following
(in thousands):
Depreciation and amortization expense totaled
approximately $4.7 million, $5.4 million, and
$5.3 million for the fiscal years ended September 30,
2003, 2002 and 2001, respectively.
On July 23, 2003, the Company acquired
substantially all of the assets and assumed certain liabilities
of uRoam, Inc. (uRoam) for cash of $25.0 million. The
Company also incurred $2.4 million of direct transaction
costs for a total purchase price of $27.4 million.
uRoams FirePass server is a comprehensive remote access
product that enables users to access applications in a secure
fashion using industry standard Secured Socket Layer (SSL)
technology. The acquisition of substantially all the assets of
uRoam is intended to allow the Company to quickly enter the
SSL Virtual Private Network market, broaden its customer
base and augment the existing product line. The Company has
hired substantially all of uRoams 20 employees, consisting
of product development, sales and service personnel.
The Company accounted for the acquisition under
the purchase method of accounting in accordance with SFAS
No. 141, Business Combinations. Under the
purchase method of accounting, the total purchase price was
allocated to the tangible and intangible assets acquired and the
liabilities assumed based on their estimated fair values. The
excess of the purchase price over those fair values was recorded
as goodwill. The fair value assigned to the tangible and
intangible assets acquired and liabilities assumed were based on
estimates and assumptions provided by management, and other
information compiled by management, including an independent
valuation, prepared by an independent valuation specialist that
utilized established valuation techniques appropriate for the
technology industry.
F-16
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price allocation is as follows (in
thousands):
To determine the value of the developed
technology, a combination of cost and market approaches were
used. The cost approach required an estimation of the costs
required to reproduce the acquired technology. The market
approach measures the fair value of the technology through an
analysis of recent comparable transactions. The
$3.0 million allocated to developed technology is being
amortized using the straight-line method over an estimated
useful life of five years. The $24.2 million allocated to
goodwill will not be amortized but will be subject to at least
an annual impairment test under the requirements of Statement of
Financial Accounting Standards No. 142 Goodwill and
other Intangible Assets.
The following unaudited pro forma condensed
combined consolidated summary financial information has been
derived by the application of pro forma adjustments to the
historical consolidated financial statements of F5 Networks
and uRoam. Assumptions underlying the pro forma adjustments are
described in the accompanying notes, which should be read in
conjunction with these unaudited pro forma condensed combined
consolidated summary financial information.
The unaudited pro forma condensed combined
consolidated summary financial information combines the
consolidated statement of operations of F5 Networks for the
year ended September 30, 2003 with uRoams unaudited
statement of operations for the nine months ended June 30,
2003 and the unaudited statement of operations for the period
July 1, 2003 through July 23, 2003, the effective date
of the uRoam acquisition, as if the acquisition had been
completed at the beginning of the year.
F-17
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Year ended September 30, 2003 (unaudited in
thousands):
Year ended September 30, 2002 (unaudited in
thousands):
The unaudited pro forma condensed combined
consolidated summary financial information for the year ended
September 30, 2002 combines the consolidated statement of
operations of F5 Networks for the fiscal year ended
September 30, 2002 with uRoams consolidated statement
of operations for the calendar year ended December 31, 2002.
Other assets consist of the following (in
thousands):
Amortization expense related to other assets was
approximately $412,000 and $231,000 for the fiscal years ended
September 30, 2003 and 2002, respectively. There was no
amortization expense related to other assets for the fiscal year
ended September 30, 2001.
F-18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Estimated amortization expense for the five
succeeding fiscal years is as follows (in thousands):
Accrued liabilities consist of the following (in
thousands):
During the third quarter of fiscal year 2002, the
Company recorded restructuring charges of approximately
$2.8 million in connection with managements decision
to exit the cache appliance business. As a result of
discontinuing this line of business and other changes in the
overall business, the Company wrote-down certain assets,
consolidated operations, and terminated 47 employees throughout
all divisions of the company. An additional charge of $503,000
related to employee separation costs was recorded in
July 2002, resulting in total restructuring charges of
$3.3 million for the fiscal year 2002. As of
September 30, 2002, total cash payments and write-offs of
approximately $2.2 million had been recorded.
The following table summarizes the movements in
the remaining restructuring charge liabilities (in thousands):
As part of the restructuring, excess facilities
costs were determined to be $1.0 million. These costs are
the result of the decision to exit a support facility in
Washington DC. The estimated facilities costs were based on
current comparable rates for leases in the respective market. In
April 2003, the excess facilities were subleased at the
then current market value through the term of the lease. The
difference between the lease payments and sublease income will
be applied against the restructuring liability until expiration
of the lease in 2007.
During the first fiscal quarter of 2001, the
Company recorded a restructuring charge totalling approximately
$1.1 million in connection with managements decision
to bring operating expenses in line
F-19
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
with the business revenue growth model.
Accordingly, the Company terminated 96 employees throughout
all divisions of the Company. By the end of January 2001, all
identified employees had been terminated. During the quarter
ended March 31, 2001, the Company reversed $96,000 of the
original accrual due to a revision of previous estimates. As of
September 30, 2001, substantially all of the restructuring
charge accrued for during the first quarter of 2001 had been
paid.
9. Income
Taxes
Income (loss) before income taxes consists of the
following (in thousands):
The provision for income taxes consists of the
following (in thousands):
The effective tax rate differs from the U.S.
federal statutory rate as follows (in thousands):
F-20
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of the temporary differences that
give rise to the deferred tax assets and liabilities are as
follows (in thousands):
As of September 30, 2003, approximately
$12.7 million of the valuation allowance related to the
Companys net operating loss carryforwards is derived from
the tax benefits of stock option deductions. At such time as the
valuation allowance related to these deductions is released, the
benefit will be credited to additional paid in capital.
The Companys deferred tax assets include
net operating loss carry forwards of approximately
$61.1 million; $52.5 million related to U.S.
operations and $8.6 million related to United Kingdom
operations. The United States net operating loss carry forwards
will begin to expire in fiscal year 2011 through 2023. The
United Kingdom net operating loss carries forward indefinitely.
The Company also has Research and Experimentation Credit carry
forwards which will begin to expire in fiscal year 2011 through
2023.
10. Shareholders
Equity
The Company has adopted a number of stock-based
compensation plans as discussed below. Options granted to
employees typically vest over a period of two to four years.
Options granted to directors typically vest over three years.
All options expire 10 years after the grant date.
The Amended and Restated 1996 Stock Option Plan,
or the 1996 Employee Plan, provides for discretionary grants of
non-qualified and incentive stock options for employees and
other service providers. A total of 2,600,000 shares of
common stock have been reserved for issuance under the 1996
Employee Plan. All outstanding, unvested options under the 1996
Employee Plan vest in full upon a change in control of the
Company. The Company does not intend to grant any additional
options under this plan. As of September 30, 2003, there
were options to purchase 394,538 shares outstanding and
33,430 shares available for awards under the 1996 Employee
Plan.
The Amended and Restated Directors
Nonqualified Stock Option Plan, or the Directors Plan,
provides for automatic grants of non-qualified stock options to
eligible non-employee directors. A total of 100,000 shares
of common stock were reserved for issuance under the
Directors Plan. All outstanding,
F-21
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unvested options under the Directors Plan
vest in full upon a change in control of the Company. This plan
was terminated in January 2003 providing that the current
outstanding options did not terminate. As of September 30,
2003 there were options to purchase 5,000 shares outstanding and
no shares available for awards under the Directors plan.
In November 1998, the Company adopted the 1998
Equity Incentive Plan, or the 1998 Plan, which provides for
discretionary grants of non-qualified and incentive stock
options, stock purchase awards and stock bonuses for employees
and other service providers. Upon certain changes in control of
the Company, all outstanding and unvested options or stock
awards under the 1998 Plan will vest at the rate of 50%, unless
assumed or substituted by the acquiring entity. As of
September 30, 2003, there were options to purchase
3,954,149 shares outstanding and 650,687 shares
available for awards under the 1998 Plan.
In July 2000, the Company adopted the 2000
Employee Equity Incentive Plan, or the 2000 Plan, which provides
for discretionary grants of non-qualified stock options, stock
purchase awards and stock bonuses for non-executive employees
and other service providers. A total of 3,500,000 shares of
common stock have been reserved for issuance under the 2000
Plan. The Company has not granted any stock purchase awards or
stock bonuses under the 2000 Plan. Upon certain changes in
control of the Company, all outstanding and unvested options or
stock awards under the 2000 Plan will vest at the rate of 50%,
unless assumed or substituted by the acquiring entity. As of
September 30, 2003, there were options to purchase
2,514,142 shares outstanding and 484,616 shares
available for awards under the 2000 Plan.
In July 2000, the Company adopted two
nonqualified stock option plans, or the McAdam Plans, in
connection with hiring John McAdam, the Companys President
and Chief Executive Officer. The first McAdam Plan provided for
a grant of 645,000 non-qualified stock options for
Mr. McAdam. This grant was cancelled and the plan was
terminated in fiscal 2002. The second McAdam Plan provided for a
grant of 50,000 options. In fiscal year 2002, the options
were fully vested and 50,000 shares were issued under the
second McAdam Plan.
In October 2000, the Company adopted a
non-qualified stock option plan in connection with the hiring of
Jeff Pancottine, the Companys Senior Vice President of
Marketing and Business Development. This Plan provides for a
grant of 200,000 non-qualified stock options for
Mr. Pancottine. All options under this plan expire
10 years from the grant date. As of September 30,
2003, there were options to purchase 200,000 shares
outstanding and no shares available for awards under the Plan.
In May 2001, the Company adopted a non-qualified
stock option plan in connection with the hiring of Steve Coburn,
the Companys Senior Vice President of Finance and Chief
Financial Officer. This plan provides for a grant of 200,000
non-qualified stock options for Mr. Coburn. As of
September 30, 2003, there were options to purchase
200,000 shares outstanding and no shares available for
awards under the Plan.
In July 2003, the Company adopted the uRoam
Acquisition Equity Incentive Plan, or the uRoam Plan, in
connection with the hiring of the former employees of uRoam. A
total of 250,000 shares of common stock have been reserved for
issuance under the uRoam Plan. The plan provides for
discretionary grants of non-qualified and incentive stock
options, stock purchase awards and stock bonuses. The Company
has not granted any stock purchase awards or stock bonuses under
this plan. As of September 30, 2003 there were options to
purchase 240,000 shares outstanding and 10,000 shares
available for awards under the uRoam Plan.
In prior years, the Company issued stock options
with an exercise price less than the deemed fair value of the
Companys common stock at the date of grant. In fiscal
years 2003 and 2002, there were no options issued below fair
market value; accordingly no additional compensation costs were
recorded. Approximately $0.1 million of deferred
compensation was recorded during fiscal year 2001 and is being
amortized over the vesting period of the options. Amortization
of stock compensation costs of
F-22
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximately $0.1 million,
$0.4 million, and $2.6 million has been recognized as
an expense for the fiscal years ended September 30, 2003,
2002 and 2001, respectively.
A summary of stock option activity under all of
the Companys plans is as follows:
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Years Ended
September 30,
2003
2002
$
650
$
200
291
1,600
(114
)
(1,150
)
$
827
$
650
Table of Contents
Years Ended September 30,
2003
2002
2001
$
4,087
$
(8,610
)
$
(30,790
)
83
443
2,625
(23,371
)
(9,276
)
(77,408
)
$
(19,201
)
$
(17,443
)
$
(105,573
)
$
0.15
$
(0.34
)
$
(1.36
)
$
(0.73
)
$
(0.69
)
$
(4.66
)
$
0.14
$
(0.34
)
$
(1.36
)
$
(0.73
)
$
(0.69
)
$
(4.66
)
Table of Contents
Years Ended September 30,
2003
2002
2001
$
4,087
$
(8,610
)
$
(30,790
)
26,453
25,323
22,644
1,767
28,220
25,323
22,644
$
0.15
$
(0.34
)
$
(1.36
)
$
0.14
$
(0.34
)
$
(1.36
)
Table of Contents
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
7,114
$
14
$
(1
)
$
7,127
27,399
1
27,400
$
34,513
$
15
$
(1
)
$
34,527
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
33,500
$
123
$
$
33,623
16,900
16,900
9,000
9
9,009
$
59,400
$
132
$
$
59,532
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
13,575
$
60
$
(17
)
$
13,618
2,000
(15
)
1,985
18,500
34
(5
)
18,529
$
34,075
$
94
$
(37
)
$
34,132
Table of Contents
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
1,310
$
36
$
$
1,346
$
1,310
$
36
$
$
1,346
Cost or
Amortized
Cost
Fair Value
$
34,513
$
34,527
34,075
34,132
$
68,588
$
68,659
3.
Inventories
Years Ended
September 30,
2003
2002
$
408
$
324
354
25
$
762
$
349
Table of Contents
4.
Other Current Assets
Years Ended
September 30,
2003
2002
$
776
$
300
731
670
380
445
517
713
241
391
2,134
2,194
$
4,779
$
4,713
5.
Property and Equipment
Years Ended
September 30,
2003
2002
$
14,248
$
11,692
5,170
5,276
7,364
7,417
26,782
24,385
(16,703
)
(12,174
)
$
10,079
$
12,211
6.
Business Combinations
Table of Contents
$
335
4
3,000
24,188
$
27,527
$
(29
)
(125
)
(154
)
$
27,373
Table of Contents
uRoam
F5 Networks
F5 Networks
Nine Months
Period from
Year Ended
Year Ended
Ended
July 1-July 23
Net Pro Forma
September 30, 2003
September 30, 2003
June 30, 2003
2003
Adjustments
Pro Forma
$
115,895
$
969
$
48
$
$
116,912
$
4,087
$
(4,896
)
$
(411
)
$
(576
)
$
(1,796
)
$
0.15
$
(0.07
)
26,453
26,453
$
0.14
$
(0.07
)
28,220
26,453
F5 Networks
F5 Networks
uRoam
uRoam, Inc.
Year Ended
Year Ended
Acquisition
(Formerly
Net Pro Forma
September 30, 2002
September 30, 2002
Corporation
Filanet)
Adjustments
Pro Forma
$
108,266
$
301
$
100
$
$
108,667
$
(8,610
)
$
(1,053
)
$
(2,035
)
$
(899
)
$
(12,597
)
$
(0.34
)
$
(0.50
)
25,323
25,323
7.
Other Assets
Years Ended
September 30,
2003
2002
$
697
521
2,900
433
412
$
4,030
$
933
Table of Contents
$
848
873
754
680
515
$
3,670
8.
Accrued Liabilities
Years Ended
September 30,
2003
2002
$
7,578
$
6,871
1,332
1,364
844
1,076
827
650
1,062
873
1,505
2,712
$
13,148
$
13,546
Balance at
Cash Payments and
Balance at
September 30, 2002
Additional Charges
Write-offs
September 30, 2003
$
1,000
$
$
(218
)
$
782
76
(14
)
62
$
1,076
$
$
(232
)
$
844
Table of Contents
Years Ended September 30,
2003
2002
2001
$
3,524
$
(7,413
)
$
(25,900
)
1,416
(708
)
(795
)
$
4,940
$
(8,121
)
$
(26,695
)
Years Ended
September 30,
2003
2002
$
$
45
22
657
467
702
489
141
10
151
$
853
$
489
Years Ended September 30,
2003
2002
2001
$
1,729
$
(2,843
)
$
(9,343
)
36
(269
)
(526
)
91
259
105
(1,017
)
(1,099
)
(653
)
(60
)
80
(33
)
4,382
5,400
14,545
(4,308
)
(1,039
)
$
853
$
489
$
4,095
Table of Contents
Years Ended September 30,
2003
2002
2001
$
22,318
$
17,478
$
13,027
844
1,961
2,408
591
471
407
198
487
1,067
1,773
1,630
1,283
831
1,011
544
4,156
3,291
2,193
30,711
26,329
20,929
(30,711
)
(26,329
)
(20,929
)
(151
)
$
(151
)
$
$
Table of Contents
Table of Contents
Options Outstanding
Weighted
Shares
Number
Average
Available for
of
Exercise Price
Grant
Shares
Per Share
1,124,332
5,303,271
$
42.69
(4,662,574
)
4,662,574
12.59
(607,987
)
1.06
1,446,975
(1,446,975
)
50.05
2,400,000
308,733
7,910,883
27.02
(2,233,850
)
2,233,850
12.52
(764,504
)
4.91
2,139,379
(2,139,379
)
52.67
1,500,000
1,714,262
7,240,850
17.30
(2,195,300
)
2,195,300
15.24
(1,423,550
)
7.60
504,771
(504,771
)
25.65
1,155,000
1,178,733
7,507,829
$
17.92
The weighted-average fair values and
weighted-average exercise prices per share at the date of grant
for options granted were as follows:
Years Ended September 30,
2003
2002
2001
$
7.46
$
10.06
$
10.54
$
15.24
$
12.52
$
12.40
N/A
N/A
$
27.89
N/A
N/A
$
29.42
F-23
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about
options outstanding at September 30, 2003:
Options Outstanding
Options Exercisable
Weighted Average
Remaining
Weighted Average
Weighted
Range of
Number of
Contractual Life
Exercise Price
Number of
Average Price
Exercise Prices
Shares
(in years)
Per Share
Shares
Per Share
361,689
5.36
$
2.36
345,145
$
2.24
2,944,684
7.95
$
9.48
2,370,675
$
9.20
1,783,742
9.23
$
14.17
429,352
$
13.69
1,568,350
8.25
$
22.92
656,849
$
26.95
849,364
6.68
$
52.48
698,248
$
53.51
7,507,829
8.05
$
17.92
4,500,269
$
18.56
Pro forma information regarding net income
(loss) is required by SFAS No. 123 and has been
determined as if the Company had accounted for its stock options
under the minimum value method for all periods prior to the
Company becoming a public entity and the fair value method for
all periods subsequent to the Company becoming a public entity.
The fair value of each option is estimated at the date of grant
using the following weighted-average assumptions:
Stock Option Plan
Years Ended September 30,
Years Ended September 30,
Employee Stock Purchase Plan
2003
2002
2001
2003
2002
2001
2.33
%
4.12
%
4.81
%
1.23
%
2.57
%
4.49
%
4.0 years
4.3 years
4.0 years
0.5 years
0.5 years
0.5 years
49.95
%
99.41
%
138.79
%
72.93
%
99.41
%
138.79
%
1999 Employee Stock Purchase Plan
In May 1999, the board of directors approved the adoption of the 1999 Employee Stock Purchase Plan (the Employee Stock Purchase Plan). A total of 1,000,000 shares of common stock have been reserved for issuance under the Employee Stock Purchase Plan. The Employee Stock Purchase Plan permits eligible employees to acquire shares of the Companys common stock through periodic payroll deductions of up to 15% of base compensation. No employee may purchase more than $25,000 worth of stock, determined at the fair market value of the shares at the time such option is granted, in one calendar year. The Employee Stock Purchase Plan has been implemented in a series of offering periods, each 6 months in duration. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of the Companys common stock on the first day of the applicable offering period or on the last day of the respective purchase period. As of September 30, 2003 there were 311,332 shares available for awards under the Employee Stock Purchase Plan.
11. | Commitments and Contingencies |
Operating Leases
In April 2000, the Company amended and restated the lease agreement for its corporate headquarters in Seattle, Washington. The lease expires in 2012 with an option for renewal. The lease commenced in July 2000 on the first building; and the lease on the second building commenced in September 2000. The second building has been fully subleased until 2012. The Company also leases office space for product development personnel in Spokane, Washington and San Jose, California and for sales and support
F-24
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
personnel in Washington DC, New York, Hong Kong,
Singapore, Taiwan, Japan, Australia, Germany, France, and the
United Kingdom. The lease for the Washington DC office has
been primarily subleased through 2007.
Future minimum operating lease payments, net of
sublease income, are as follows (in thousands):
Gross
Net
Lease
Sublease
Lease
Payments
Income
Payments
$
6,062
$
3,335
$
2,727
5,622
3,451
2,171
5,702
3,567
2,135
5,597
3,571
2,026
5,516
3,571
1,945
22,180
14,710
7,470
$
50,679
$
32,205
$
18,474
Rent expense under non-cancelable operating leases amounted to approximately $4.5 million, $4.4 million, and $4.8 million for the fiscal years ended September 30, 2003, 2002, and 2001, respectively.
Litigation
In July and August 2001, a series of putative securities class action lawsuits were filed in United States District Court, Southern District of New York against certain investment banking firms that underwrote the Companys initial and secondary public offerings, the Company and some of the Companys officers and directors. These cases, which have been consolidated under In re. F5 Networks, Inc. Initial Public Offering Securities Litigation, No. 01 CV 7055, assert that the registration statements for the Companys June 4, 1999 initial public offering and September 30, 1999 secondary offering failed to disclose certain alleged improper actions by the underwriters for the offerings. The consolidated, amended complaint alleges claims against the Company and those of our officers and directors named in the complaint under Sections 11 and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Other lawsuits have been filed making similar allegations regarding the public offerings of more than 300 other companies. All of these various consolidated cases have been coordinated for pretrial purposes as In re. Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. In October 2002, the directors and officers were dismissed without prejudice. The issuer defendants filed a coordinated motion to dismiss these lawsuits in July 2002, which the Court granted in part and denied in part in an order dated February 19, 2003. The Court declined to dismiss the Section 11 and Section 10(b) and Rule 10b-5 claims against the Company. In June 2003, a proposal was made for the settlement and release of claims against the issuer defendants and their directors and officers, including us, in exchange for a guaranteed recovery to be paid by the issuer defendants insurance carriers and an assignment of certain claims against the underwriters. The settlement is subject to a number of conditions, including approval by the proposed settling parties and the Court. If the settlement does not occur, and litigation against us continues, we believe we have meritorious defenses and intend to defend the case vigorously. Securities class action litigation could result in substantial costs and divert our managements attention and resources. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation, and any unfavorable outcome could have a material adverse impact on our business, financial condition and operating results.
We are not aware of any additional pending legal proceedings against us that, individually or in the aggregate, would have a material adverse effect on our business, operating results, or financial condition.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We may in the future be party to litigation arising in the course of our business, including claims that we allegedly infringe third-party trademarks and other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
12. | Related Party Transactions |
In October 2000, the Company extended a loan to an executive officer and his wife, in the principal amount of $350,000, in order to facilitate the purchase of a residence in the Seattle area. On March 15, 2002, payments due under the note were extended for a period of one year, as allowed per the terms of the note. This loan is evidenced by a promissory note, the principal of which is payable in three equal installments, together with accrued interest, on March 31, 2002, March 31, 2003, and March 31, 2004, or immediately upon the sale of the residence or termination of the officers employment. Interest accrues on the loan at the rate of 6% per annum. The balance of the loan totaled $240,354 at September 30, 2003. The residence was sold in October 2003 and the loan was repaid in full on October 20, 2003.
13. | Employee Benefit Plans |
The Company has a 401(k) savings plan whereby eligible employees may voluntarily contribute a percentage of their compensation. The Company may, at its discretion, match a portion of the employees eligible contributions. Contributions by the Company to the plan during the years ended September 30, 2003, 2002, and 2001 were approximately $852,000, $950,000, and $953,000, respectively. Contributions made by the Company vest over four years.
14. | Geographic Sales and Significant Customers |
The following presents revenues by geographic
region (in thousands):
Years Ended September 30,
2003
2002
2001
$
75,409
$
73,458
$
72,406
16,880
13,990
10,004
23,606
20,818
24,957
$
115,895
$
108,266
$
107,367
The Companys customers are in diverse industries and geographic locations. Net revenues from international customers are primarily denominated in U.S. Dollars and totaled approximately $40.5 million, $34.8 million, and $35.0 million for the years ended September 30, 2003, 2002 and 2001, respectively. One domestic distributor accounted for 12.6% of total net revenue for fiscal year 2003. This distributor accounted for 17.8% of accounts receivable as of September 30, 2003. During the years ended September 30, 2002 and 2001, no single reseller or customer exceeded 10% of the Companys net revenue or accounts receivable balance.
15. | Quarterly Results of Operations |
The following presents the Companys unaudited quarterly results of operations for the eight quarters ended September 30, 2003. The information should be read in conjunction with the Companys financial statements and related notes included elsewhere in this report. This unaudited information has been prepared on the same basis as the audited financial statements and includes all adjustments, consisting only of normal recurring adjustments that were considered necessary for a fair presentation of our
F-26
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operating results for the quarters presented. The
following presents quarterly results of operations (unaudited
and in thousands):
Three Months Ended
Sept. 30,
June 30,
March 31,
Dec. 31,
Sept. 30,
June 30,
March 31,
Dec. 31,
2003
2003
2003
2002
2002
2002
2002
2001
$
23,048
$
21,310
$
20,338
$
19,501
$
20,376
$
20,750
$
20,782
$
20,658
8,585
7,879
7,679
7,555
6,699
6,315
6,319
6,367
31,633
29,189
28,017
27,056
27,075
27,065
27,101
27,025
5,086
4,491
4,203
4,057
4,046
5,081
5,151
5,963
2,342
2,290
2,275
2,161
2,360
2,504
2,680
2,694
7,428
6,781
6,478
6,218
6,406
7,585
7,831
8,657
24,205
22,408
21,539
20,838
20,669
19,480
19,270
18,368
14,045
13,593
13,061
12,759
13,062
13,256
11,823
12,440
5,155
4,810
4,886
4,395
4,312
4,785
4,751
4,137
2,964
2,800
2,900
3,350
3,427
3,049
4,524
4,045
503
2,771
6
6
5
66
90
106
114
133
22,170
21,209
20,852
20,570
21,394
23,967
21,212
20,755
2,035
1,199
687
268
(725
)
(4,487
)
(1,942
)
(2,387
)
(375
)
352
312
462
355
287
273
505
1,660
1,551
999
730
(370
)
(4,200
)
(1,669
)
(1,882
)
307
152
184
210
53
146
101
189
$
1,353
$
1,399
$
815
$
520
$
(423
)
$
(4,346
)
$
(1,770
)
$
(2,071
)
$
.05
$
.05
$
.03
$
.02
$
(.02
)
$
(.17
)
$
(.07
)
$
(.08
)
27,125
26,638
26,164
25,883
25,670
25,537
25,203
24,883
$
.05
$
.05
$
.03
$
.02
$
(.02
)
$
(.17
)
$
(.07
)
$
(.08
)
29,521
28,467
27,494
26,935
25,670
25,537
25,203
24,883
(1) | During the fourth quarter of fiscal year 2003, the Company reversed a $250 reserve initially established for an amount considered potentially uncollectible. The amount was recovered pursuant to a settlement agreement and the reversal of the reserve was recorded as a credit to general and administrative expenses. |
F-27
$125,000,000
F5 NETWORKS, INC.
Debt Securities
The aggregate of the offering prices of the securities covered by this prospectus will not exceed $125,000,000.
The securities may be sold by us directly to investors, through agents designated from time to time or through or to underwriters or dealers. See Plan of Distribution. If any agents or underwriters are involved in the sale of any securities in respect of which this prospectus is being delivered, the names of such agents or underwriters and any applicable commissions or discounts will be set forth in the applicable prospectus supplement. The net proceeds we expect to receive from such sale also will be set forth in the applicable prospectus supplement.
This prospectus may not be used by us to consummate the sale of any securities unless accompanied by a prospectus supplement.
Our common stock is quoted on the NASDAQ National Market under the trading symbol FFIV. Any common stock sold by us pursuant to a prospectus supplement will be listed on the NASDAQ National Market, subject to official notice of issuance.
See RISK FACTORS on page 2 for information you should consider before buying these securities.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is October 28, 2003.
We have not authorized anyone to provide you with information different from that contained in this prospectus. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of securities.
TABLE OF CONTENTS
Page | ||||
|
||||
Risk Factors
|
2 | |||
Use of Proceeds
|
2 | |||
Ratio of Earnings to Fixed Charges
|
2 | |||
Description of Debt Securities
|
3 | |||
Description of Capital Stock
|
11 | |||
Description of Depositary Shares
|
13 | |||
Description of Warrants
|
16 | |||
Description of Purchase Contracts and Units
|
18 | |||
Plan of Distribution
|
19 | |||
Legal Matters
|
20 | |||
Experts
|
20 | |||
Incorporation by Reference
|
20 | |||
Where You Can Find Additional Information
|
21 |
Our executive offices are located at 401 Elliott Avenue West, Seattle, Washington 98119 and our telephone number is (206) 272-5555.
RISK FACTORS
You should carefully consider the specific risks
set forth under the caption Risk Factors in the
applicable prospectus supplement and under the caption
Risk Factors in our Annual Report on Form 10-K,
as updated in our Quarterly Reports on Form 10-Q, which are
incorporated by reference in this prospectus, before making an
investment decision.
USE OF PROCEEDS
The use of proceeds to be received by us from the
sale of the Securities will be described in the applicable
prospectus supplement.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of
earnings to fixed charges for the company for each of the
periods indicated. Earnings consist of income from continuing
operations before income taxes, plus fixed charges. Fixed
charges consist of an estimate of the interest portion of rental
expense.
2
Nine
Months
Ended
Year Ended September 30,
June 30,
2003
2002
2001
2000
1999
1998
$
3,280
$
(8,121
)
$
(26,695
)
$
15,755
$
(4,344
)
$
(3,672
)
1,121
1,451
1,592
623
155
48
$
4,401
$
(6,670
)
$
(25,103
)
$
16,378
$
(4,189
)
$
(3,624
)
3.93
N/A
N/A
26.29
N/A
N/A
N/A
$
(8,121
)
$
(26,695
)
N/A
$
(4,344
)
$
(3,672
)
(1)
Ratio of earnings to fixed charges represents the
ratio of net income (loss), before fixed charges and income
taxes, to fixed charges, where fixed charges are an allocation
of rental charges to approximate equivalent interest.
(2)
Due to the loss we incurred in 1998, 1999, 2001
and 2002, the ratio coverage is less than 1:1. We would have had
to have generated additional earnings in the amounts indicated
to achieve a ratio
of 1:1.
Table of Contents
DESCRIPTION OF DEBT SECURITIES
The following description of the debt securities
sets forth the general terms and provisions of the debt
securities to which any prospectus supplement may relate. The
particular terms of the debt securities offered by any
prospectus supplement and the extent, if any, to which such
general provisions may not apply to the debt securities, will be
described in the prospectus supplement relating to such debt
securities. Accordingly, for a description of the terms of a
particular issue of debt securities, reference must be made to
both the prospectus supplement relating thereto and to the
following description.
Senior debt securities may be issued from time to
time under an indenture dated as of September 30, 2003 (the
Senior Indenture) between us and U.S. Bank, N.A.
(the Senior Trustee). Subordinated debt securities
may be issued from time to time under an indenture dated as of
September 30, 2003 (the Subordinated Indenture)
between us and U.S. Bank, N.A. (the Subordinated
Trustee). Together the Senior Indenture and the
Subordinated Indenture are called the indentures.
We have summarized selected provisions of the
indentures below. The Senior Indenture and Subordinated
Indenture have been filed as exhibits to the registration
statement filed with the Securities and Exchange Commission, or
SEC, and you should read the indentures for provisions that may
be important to you. Accordingly, the following summary is
qualified in its entirety by reference to the provisions of the
indentures.
General
The indentures do not limit the aggregate
principal amount of debt securities which may be issued under
the indentures and provide that debt securities may be issued
from time to time in one or more series. The indentures do not
limit the amount of other indebtedness or debt securities, other
than certain secured indebtedness as described below, which may
be issued by us or our subsidiaries.
Unless otherwise provided in a prospectus
supplement, the debt securities will be our unsecured
obligations. The senior debt securities will rank equally with
all other unsecured and unsubordinated indebtedness of ours. The
subordinated debt securities will be subordinated in right of
payment to the prior payment in full of all senior debt
including our senior debt securities as described below under
Subordination and in the applicable
prospectus supplement.
The debt securities may be issued in fully
registered form without coupons (registered
securities) or in bearer form with or without coupons
(bearer securities) or in the form of one or more
global securities (each a Global Security).
Registered securities that are book-entry securities will be
issued as registered Global Securities. Bearer securities may be
issued in the form of temporary or definitive Global Securities.
Unless otherwise provided in the prospectus supplement, the debt
securities will be only registered securities.
Unless otherwise provided in a prospectus
supplement, payment of principal of, premium, if any, and
interest on any debt securities will be paid by us in
immediately available funds. Unless otherwise provided in a
prospectus supplement, the corporate trust office of the trustee
will be designated as our sole paying agent. All moneys paid by
us to a paying agent for payments of principal of, premium, if
any or interest, if any, on any debt security or coupon that
remain unclaimed at the end of two years after such principal,
premium or interest shall have become due and payable will be
repaid to us and the holder of such debt security or coupon will
thereafter look only to us for payment thereof.
The prospectus supplement relating to the
particular debt securities offered thereby will describe the
terms of such securities. Those terms will include some or all
of the following:
3
No service charge will be made for any transfer
or exchange of the debt securities except to cover any tax or
other governmental charge. The prospectus supplement for any
debt securities issued above par or
4
Subordination
We will issue under the Subordinated Indenture
the debt securities that will constitute part of our
subordinated debt. These subordinated debt securities will be
subordinate and junior in right of payment, to the extent and in
the manner set forth in the Subordinated Indenture, to all of
our senior debt. The term senior debt is defined in
the Subordinated Indenture to mean any obligation of ours to our
creditors whether now outstanding or subsequently incurred other
than (i) where it is expressly provided in the instrument
creating or evidencing the same that such obligation is not
senior debt, (ii) debt securities issued under the
Subordinated Indenture, and (iii) obligations that are
expressly stated in their terms not to be senior debt.
In the event of any liquidation, dissolution,
winding up or reorganization of, or any insolvency proceedings
involving, us, or any assignment by us for the benefit of
creditors or any other marshaling of our assets, the holders of
all senior debt will first be entitled to receive payment in
full before the holders of the subordinated debt securities will
be entitled to receive any payment upon the principal of or
premium, if any, or interest on the subordinated debt securities.
In the event that we default in the payment of
any principal of (or premium, if any) or interest on any senior
debt when the same becomes due and payable, whether at maturity
or at a date fixed for prepayment or by declaration of
acceleration or otherwise, then, upon written notice of such
default to us by the holders of such senior debt or any trustee
therefor, unless and until such default shall have been cured or
waived or shall have ceased to exist, we may not make or agree
to make any direct or indirect payment (in cash, property,
securities, by set-off or otherwise):
Any payment or distribution, which would
otherwise (but for these subordination provisions) be payable or
deliverable in respect of the subordinated debt securities,
shall be paid or delivered directly to the holders of senior
debt in accordance with the priorities then existing among such
holders until all senior debt (including any interest thereon
accruing after the commencement of any liquidation or similar
proceedings) shall have been paid in full. In the event of any
such proceeding, after payment in full of all sums owing with
respect to senior debt, the holders of the subordinated debt
securities, together with the holders of any of our obligations
ranking on a parity with our subordinated debt securities, shall
be entitled to be paid from our remaining assets the amounts at
the time due and owing on account of unpaid principal of (and
premium, if any) and interest on such securities before any
payment or other distribution, whether in cash, property or
otherwise, shall be made on account of any of our capital stock
obligations ranking junior to such securities.
In the event that, notwithstanding the foregoing,
the trustee or the holders of the subordinated debt securities
receive any payment or distribution on account of or in respect
of the subordinated debt securities, such payment or
distribution will be paid over and delivered to the holders of
senior debt at the time outstanding in accordance with the
priorities then existing among such holders for application to
the payment of all senior debt remaining unpaid, to the extent
necessary to pay all such senior debt in full.
Upon the payment in full of all senior debt and
until the subordinated debt securities shall have been paid in
full, the holders of subordinated debt securities shall be
subrogated to all rights of any holders of senior debt to
receive any further payments or distributions applicable to the
senior debt.
5
By reason of the subordination, in the event of
our bankruptcy, dissolution or reorganization, holders of senior
debt may receive more, ratably, than holders of the subordinated
debt securities. Such subordination will not prevent the
occurrence of an event of default under the Subordinated
Indenture.
The Subordinated Indenture does not limit or
restrict our ability to incur additional senior debt, but
certain of our other debt instruments may from time to time
contain such limitations.
Absence of Restrictive Covenants
We are not restricted by either of the indentures
from paying dividends or from incurring, assuming or becoming
liable for any type of debt or other obligations or from
creating liens on our property for any purpose, except as may
described in an applicable prospectus supplement. The indentures
do not require the maintenance of any financial ratios or
specified levels of net worth or liquidity. The indentures do
not contain provisions which afford holders of the debt
securities protection in the event of a highly leveraged
transaction involving us.
Merger and Consolidation
Each indenture provides that we will not
consolidate with or merge into any other corporation or sell or
convey all or substantially all our assets to any person or
entity unless either we shall be the continuing corporation or:
Each indenture provides that, upon any
consolidation, merger, sale or conveyance in accordance with the
preceding paragraph and upon any such assumption by the
successor entity, such successor entity shall be substituted for
us with the same effect as if such successor entity had been
named as us.
Satisfaction and Discharge;
Defeasance
An indenture will cease to be in effect if at any
time (1) we have delivered all relevant debt securities to
the trustee for cancellation or (2) all debt securities not
so delivered have become due and payable, will become due and
payable within one year or are to be called for redemption
within one year and we have deposited or caused to be deposited
with the trustee an amount sufficient to pay all principal (and
premium, if any), interest, if any, and additional amounts, if
any, to the date of maturity or redemption, and, in each case,
we have paid or caused to be paid all other sums payable with
respect to such debt securities.
If specified in the applicable prospectus
supplement, we will, at our option, either be discharged from
our obligations under the outstanding debt securities of a
series or cease to be under any obligation to comply with any
term, provision, condition or covenant specified applicable to
such series upon satisfaction of the following conditions:
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Modification of the Indenture
Each indenture provides that we and the trustee
thereunder may, without the consent of any holders of debt
securities, enter into supplemental indentures for the purposes
of, among other things:
provided that such action shall not adversely
affect the interests of the holders of any series of debt
securities in any material respect.
Each indenture contains provisions permitting us,
with the consent of the holders of not less than a majority in
principal amount of the outstanding debt securities of all
affected series then outstanding, to execute supplemental
indentures adding any provisions to or changing or eliminating
any of the provisions of such indenture or modifying the rights
of the holders of the debt securities of such series, except
that no such supplemental indenture may, without the consent of
the holders of all the outstanding debt securities affected
thereby, among other things:
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Events of Default
An event of default in respect of any series of
debt securities (unless it is either inapplicable to a
particular series or has been modified or deleted with respect
to any particular series) is defined in each indenture to be:
If an event of default described in
items (1) through (4) above occurs with respect to any
series, the trustee or the holders of at least 25% in aggregate
principal amount of all debt securities then outstanding
affected by the event of default may declare the principal (or,
in the case of discounted debt securities, the amount specified
in their terms) of all debt securities of the affected series to
be due and payable.
If any event of default described in
item (5) above occurs, the trustee or the holders of at
least 25% in aggregate principal amount of all the debt
securities then outstanding (voting as one class) may declare
the principal (or, in the case of discounted debt securities,
the amount specified in their terms) of all outstanding debt
securities not already due and payable to be due and payable.
If the principal amount of debt securities has
been declared due and payable, the holders of a majority in
aggregate principal amount of the outstanding debt securities of
the applicable series (or of all the outstanding debt
securities) may waive any event of default with respect to that
series (or with respect to all outstanding debt securities) and
rescind and annul a declaration of acceleration if:
Each indenture provides that the holders of not
less than a majority in principal amount of the outstanding debt
securities of any series may on behalf of the holders of all of
the outstanding debt securities of such series waive any past
default under such indenture with respect to such series and its
consequences, except a default (1) in the payment of the
principal of (or premium, if any) or interest, if any, on any of
the debt securities of such series or (2) in respect of a
covenant or provision of such
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Each indenture contains provisions entitling the
trustee thereunder, subject to the duty of the trustee during an
event of default in respect of any series of debt securities to
act with the required standard of care, to be indemnified by the
holders of the debt securities of such series before proceeding
to exercise any right or power under such indenture at the
request of the holders of the debt securities of such series.
Each indenture provides that the trustee will,
within 90 days after the occurrence of a default in respect
of any series of debt securities, give to the holders of the
debt securities of such series notice of all uncured and
unwaived defaults known to it; provided, however, that, except
in the case of a default in the payment of the principal of (or
premium, if any) or any interest on, or additional amounts, if
any, on any of the debt securities of such series, the trustee
will be protected in withholding such notice if it in good faith
determines that the withholding of such notice is in the
interests of the holders of the debt securities of such series.
The term default for the purpose of this provision only means
any event that is, or after notice or lapse of time, or both,
would become, an event of default with respect to the debt
securities of such series.
We will be required to furnish annually to each
trustee a certificate as to compliance with all conditions and
covenants under the indentures.
Notices
Except as otherwise provided in each indenture,
notices of meetings to holders of bearer securities will be
given by publication at least twice in a daily newspaper in the
City of New York and in such other city or cities as may be
specified in such bearer securities and will be mailed to such
persons whose names and addresses were previously filed with the
trustee under the applicable indenture, within the time
prescribed for the giving of such notice. Notices to holders of
registered securities will be given by mail to the addresses of
such holders as they appear in the security register.
Global Securities
The debt securities of a series may be issued in
whole or in part as one or more Global Securities that will be
deposited with, or on behalf of, a depositary located in the
United States (a U.S. Depositary) or a common
depositary located outside the United States (a Common
Depositary) identified in the prospectus supplement
relating to such series. Global Securities may be issued in
either registered or bearer form, and in either temporary or
definitive form.
The specific terms of the depositary arrangement
with respect to any debt securities of a series will be
described in the prospectus supplement relating to such series.
Limitations on Issuance of Bearer
Securities
Generally, in compliance with United States
federal income tax laws and regulations, bearer securities other
than bearer securities with a maturity not exceeding one year
from the date of issue, may not be offered or sold during the
restricted period (as defined in United States Treasury
Regulations Section 1.163-5(c)(2)(i)(D)(7)) or delivered in
connection with their sale during the restricted period in the
United States or its possessions or to United States persons
(each as defined below) other than to an office located outside
the United States or its possessions of a United States
financial institution (within the meaning of United States
Treasury Regulations Section 1.163-5(c)(2)(i)(D)(6))
purchasing for its own account or for resale or for the account
of certain customers that agrees in writing to comply with the
requirements of Section 165(j)(3)(A), (B) or (C) of the
Code and the United States Treasury Regulations thereunder, or
to certain other persons described in United States Treasury
Regulations Section 1.163-5(c)(2)(i)(D)(l)(iii)(B). Any
underwriters, agents and dealers participating in the offering
of debt securities must agree that they will not offer or sell
any bearer securities in the United States or its
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Bearer securities and their interest coupons will
bear a legend substantially to the following effect: Any
United States person who holds this obligation will be subject
to limitations under the United States income tax laws,
including the limitations provided in Sections 165(j) and
1287(a) of the Internal Revenue Code. The Code sections
referred to in the legend provide that, with certain exceptions,
a United States person holding a bearer security or coupon will
not be permitted to deduct any loss, and will not be eligible
for capital gain treatment with respect to any gain, realized on
a sale, exchange or redemption of such bearer security or coupon.
As used in this prospectus, United States
person means:
Concerning the Trustees
The Trustee assumes no responsibility for this
prospectus and has not reviewed or undertaken to verify any
information contained in this prospectus
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(1) the designation of the debt securities
being offered;
(2) whether such debt securities are senior
debt securities or subordinated debt securities;
(3) the authorized denominations if other
than $1,000 (or integrals of $1,000) for registered debt
securities,
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(4) any limit on the aggregate principal
amount of such debt securities;
(5) the percentage of their principal amount
at which such debt securities will be issued;
(6) the maturity date or dates of such debt
securities;
(7) the annual interest rate or rates, if
any, which may be fixed or variable; and the manner of
calculating any variable interest rate;
(8) the date or dates from which interest,
if any, will accrue (or the method of determining such date or
dates), and the interest payment dates and, in the case of
registered securities, their associated record dates;
(9) whether we may redeem such debt
securities and, if so, the redemption period or periods;
redemption price or prices, and other applicable terms of
redemption;
(10) the obligation, if any, of ours to
redeem, purchase or repay such debt securities pursuant to any
mandatory redemption, sinking fund or analogous provisions or at
the option of the holder thereof and, if so, the redemption
period or periods; redemption price or prices, and other
applicable terms of redemption;
(11) provisions for the defeasance of such
debt securities;
(12) the form in which we will issue debt
securities (registered or bearer), any restrictions on the
exchange of one form for another and on the offer, sale and
delivery of debt securities in either form;
(13) whether and under what circumstances we
will pay additional amounts on debt securities in respect of
specified taxes, assessments or other governmental charges
withheld or deducted, and if so, whether we have the option to
redeem the affected debt securities rather than pay such
additional amounts;
(14) the terms, if any, upon which such debt
securities of the series may be convertible into other
securities and the terms and conditions upon which such
conversion shall be effected, including the initial conversion
price and the date on which the right to convert expires;
(15) any exchanges on which such debt
securities will be listed;
(16) whether such debt securities are to be
issued in global form and, if so, the identity of the depositary
for such Global Securities
(17) the place or places where the principal
of, premium, if any, interest, if any, and certain additional
amounts required in respect of taxes owed to holders of debt
securities, if any, on such debt securities is payable;
(18) if the amount of principal of and
interest on such debt securities may be determined with
reference to an index based on a currency other than that in
which such debt securities are denominated, the manner of
determining such amounts;
(19) the portion of the principal amount (if
other than the entire principal amount) of the debt securities
payable upon declaration of acceleration of their maturity date;
(20) the form and terms of any certificates,
documents or conditions required, if any, for the issuance of
debt securities in definitive form;
(21) any trustees, depositories,
authenticating or paying agents, transfer agents, registrars or
any other agents with respect to such debt securities; and
(22) any other terms of such debt securities.
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on account of the principal of (or premium, if
any) or interest on any of our subordinated debt securities, or
in respect of any redemption, repayment,
retirement, purchase or other acquisition of any of our
subordinated debt securities.
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the successor is an entity organized under the
laws of the United States or any state in the United States;
the successor expressly assumes our obligations
under such indenture and the debt securities issued thereunder;
immediately after giving effect to such
transaction, no event of default and no event which, after
notice or lapse of time or both, would become an event of
default under the indentures, shall have occurred and be
continuing; and
certain other conditions are met.
we have irrevocably deposited with the trustee in
trust either money, or obligations issued or guaranteed by the
United States of America sufficient to pay and discharge the
entire indebtedness of all the outstanding debt securities of
such series, or fulfilled such other terms and conditions
specified in the applicable prospectus supplement;
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we have paid or caused to be paid all other sums
payable with respect to the outstanding debt securities of such
series;
the trustee has received an officers
certificate and opinion of legal counsel each stating that all
conditions precedent have been complied with; and
the trustee has received an opinion of tax
counsel confirming that the holders of the debt securities of
such series will not recognize income, gain or loss for federal
income tax purposes as a result of our exercise of our option to
defease and discharge our obligations under the indenture with
respect to such series and will be subject to federal income tax
on the same amount and in the same manner and at the same times
as would have been the case if such deposit and discharge had
not occurred.
adding to our covenants and making a default of
such covenant an event of default,
establishing the form or terms of debt securities
and adding or changing any provision necessary to permit or
facilitate the issuance of a new series of debt securities,
evidencing a successor to us or a successor or
additional trustee in accordance with the terms of such
indenture,
conveying, transferring, assigning, mortgaging or
pledging any property to or with the trustee or
curing ambiguities, defects or inconsistencies in
such indenture;
(1) (a) change the fixed maturity of
any debt securities, (b) reduce their principal amount or
premium, if any, (c) reduce the rate or extend the time of
payment of interest or any additional amounts payable on the
debt securities, (d) reduce the amount due and payable upon
acceleration of the maturity of the debt securities or the
amount provable in bankruptcy or (e) make the principal of,
or any interest, premium or additional amounts on, any debt
security payable in a coin or currency different from that
provided in the debt security,
(2) impair the right to initiate suit for
the enforcement of any such payment on or after the stated
maturity or scheduled redemption date of the debt securities, or
(3) reduce the percentage of debt
securities, stated above, required for consent of the holders of
the debt securities to any modification described above, or the
percentage required for the consent of the holders to waive
defaults.
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(1) a default in the payment of principal of
(and premium, if any, on) such series of debt securities,
whether payable at maturity, by call for redemption, pursuant to
any sinking fund or otherwise;
(2) a default for 30 days in the
payment when due of interest or additional amounts, if any, on
such series of debt securities;
(3) a default for 90 days after a
notice of default with respect to the performance of any other
covenant or agreement applicable to the debt securities or
contained in the indenture;
(4) a default by us or any Significant
Subsidiary in any payment of $25,000,000 or more of principal of
or interest on any Debt or in the payment of $25,000,000 or more
on account of any guarantee in respect of Debt, beyond any
period of grace that the instrument or agreement under which
such Debt or guarantee was created (for these purposes, the term
Significant Subsidiary is defined as any Subsidiary
of ours, that, at any time, has at least 5% of the consolidated
revenues of F5 Networks, Inc. and our Subsidiaries at such time
as reflected in our most recent annual audited consolidated
financial statements. The terms Debt means notes,
bonds, debentures or other similar evidences of indebtedness for
money borrowed; and Subsidiary means any corporation
or other entity of which at least a majority of the outstanding
stock or other beneficial interests having by the terms thereof
ordinary voting power to elect a majority of the board of
directors or other governing body of such corporation or other
entity (irrespective of whether or not at the time stock or
other beneficial interests of any other class or classes of such
corporation or other entity shall have or might have voting
power by reason of the happening of any contingency) is at the
time owned by us, and/or by one or more of our Subsidiaries.
(5) certain events of bankruptcy, insolvency
or reorganization.
we pay, or deposit with the trustee a sum
sufficient to pay, all required payments on the debt securities
which shall have become due otherwise than by acceleration, with
interest, plus certain fees, expenses, disbursements and
advances of the trustee and
all defaults under the indenture have been
remedied.
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an individual citizen or resident of the United
States,
a corporation or partnership organized in or
under the laws of the United States or any state thereof or the
District of Columbia,
an estate or trust the income of which is subject
to United States federal income taxation regardless of its
source, or
a trust the administration of which is subject to
the primary supervision of a court within the United States and
for which one or more United States fiduciaries have the
authority to control all substantial decisions. The term
United States means the United States of America
(including the States thereof and the District of Columbia) and
possessions of the United States include the
Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam,
American Samoa, Wake Island and the Northern Mariana Islands.
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DESCRIPTION OF CAPITAL STOCK
Our Articles of Incorporation authorize the
issuance of up to 100,000,000 shares of common stock and up
to 10,000,000 shares of preferred stock, no par value per
share, issuable in one or more series with such terms and at
such times and for such consideration as our board of directors
determines. As of October 15, 2003, there were issued and
outstanding 27,470,233 shares of common stock. No shares of
preferred stock were outstanding.
The following description contains a summary of
material features of our capital stock, but does not purport to
be complete and is subject in all respects to the applicable
provisions of the Washington Business Corporations Act, or WBCA,
and is qualified in its entirety by reference to our Articles of
Incorporation.
Common Stock
Each holder of our common stock is entitled to
one vote for each share held on all matters voted upon by
shareholders. Shareholders are not permitted to cumulate their
votes for the election of directors.
In the event of the liquidation, dissolution or
distribution of assets of our company, holders of common stock
will be entitled to share ratably in any of our remaining assets
legally available for distribution to the shareholders after
payment of all liabilities and amounts owed with respect to any
shares of preferred stock that may be outstanding at that time.
Holders of common stock are not entitled to
preemptive rights with respect to any additional shares of
capital stock that may be issued.
The authorized but unissued and unreserved shares
of common stock will be available for general corporate
purposes, including but not limited to possible issuance as
stock dividends or stock splits, in future mergers or
acquisitions, for employee benefit plans, or in a future
underwritten or other public offering. Except as otherwise
required to approve the transactions in which the additional
authorized shares of common stock would be issued, no
shareholder approval will be required for the issuance of these
shares.
Preferred Stock
In this section we describe the general terms
that will apply to preferred stock that we may offer by this
prospectus in the future. When we issue a particular series, we
will describe the specific terms of the series of preferred
stock in a prospectus supplement. The description of provisions
of our preferred stock included in any prospectus supplement may
not be complete and is qualified in its entirety by reference to
the description in our Articles of Incorporation and our
certificate of designation, which will describe the terms of the
offered preferred stock and be filed with the SEC at the time of
sale of that preferred stock. At that time, you should read our
Articles of Incorporation and any certificate of designation
relating to each particular series of preferred stock for
provisions that may be important to you.
Under our Articles of Incorporation, our board of
directors is authorized to issue preferred stock in one or more
series, each with such voting powers (full, limited or none),
designations, preferences and relative, participating, optional
or other special rights, and such qualifications, limitations or
restrictions thereof, as they may fix or designate without any
further vote or action by our stockholders.
We will describe the specific terms of a series
of preferred stock in a prospectus supplement, including some or
all of the following:
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(1) the maximum number of shares of the
series and their designations;
(2) any annual dividend rate;
(3) any dates that dividends begin to accrue
or accumulate;
(4) whether the dividends will be
cumulative, and any dividend preference;
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(5) the price, terms and conditions of any
redemption;
(6) any liquidation preference;
(7) whether the shares will be subject to,
and the terms and provisions of, a retirement or sinking fund;
(8) any terms and conditions for conversion
or exchange of the shares into or for shares of any other class
of our securities;
(9) any voting rights;
(10) whether fractional interests will be
offered in the form of depositary shares; and
(11) any or all other preferences or other
rights or restrictions of the shares of the series.
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DESCRIPTION OF DEPOSITARY SHARES
We describe in this section the general terms of
the depositary shares. We will describe the specific terms of
the depositary shares in a prospectus supplement. The following
description of the deposit agreement, the depositary shares and
the depositary receipts is only a summary and you should refer
to the forms of the deposit agreement and depositary share
certificate that will be filed with the SEC in connection with
any particular offering of depositary shares.
General
We may offer fractional interests in preferred
stock, rather than full shares of preferred stock. In that case,
we will provide for the issuance by a depositary to investors of
receipts for depositary shares, each representing a fractional
interest in a share of a particular series of preferred stock.
The shares of any series of preferred stock
underlying the depositary shares will be deposited under a
separate deposit agreement between us and the depositary, which
must be a bank or trust company having its principal office in
the United States and having a combined capital and surplus of
at least $50 million. The applicable prospectus supplement
will set forth the name and address of the depositary. Subject
to the terms of the deposit agreement, each owner of a
depositary share will have a fractional interest in all the
rights and preferences of the preferred stock underlying such
depositary share. Those rights include any dividend, voting,
redemption, conversion and liquidation rights.
The depositary shares will be evidenced by
depositary receipts issued under the deposit agreement. If you
purchase fractional interests in shares of the related series of
preferred stock, you will receive depositary receipts as
described in the applicable prospectus supplement. While the
final depositary receipts are being prepared, we may order the
depositary to issue temporary depositary receipts substantially
identical to the final depositary receipts although not in final
form. The holders of the temporary depositary receipts will be
entitled to the same rights as if they held the depositary
receipts in final form. Holders of the temporary depositary
receipts can exchange them for the final depositary receipts at
our expense.
Withdrawal
Unless otherwise indicated in the applicable
prospectus supplement and unless the related depositary shares
have been called for redemption, if you surrender depositary
receipts at the principal office of the depositary, then you are
entitled to receive at that office the number of shares of
preferred stock and any money or other property represented by
the depositary shares. We will not issue partial shares of
preferred stock. If you deliver depositary receipts evidencing a
number of depositary shares that represent more than a whole
number of shares of preferred stock, the depositary will issue
to you a new depositary receipt evidencing the excess number of
depositary shares at the same time that the preferred stock is
withdrawn. Holders of shares of preferred stock received in
exchange for depositary shares will no longer be entitled to
deposit those shares under the deposit agreement or to receive
depositary shares in exchange for those shares of preferred
stock.
Dividends and Other Distributions
The depositary will distribute all cash dividends
or other cash distributions received with respect to the
preferred stock to the record holders of depositary shares
representing the preferred stock in proportion to the numbers of
depositary shares owned by the holders on the relevant record
date. The depositary will distribute only the amount that can be
distributed without attributing to any holder of depositary
shares a fraction of one cent. The balance not distributed will
be added to and treated as part of the next sum received by the
depositary for distribution to record holders of depositary
shares.
If there is a distribution other than in cash,
the depositary will distribute property to the holders of
depositary shares, unless the depositary determines that it is
not feasible to make such distribution. If this
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Conversion, Exchange and Redemption
Unless otherwise specified in the applicable
prospectus supplement, neither the depositary shares nor the
series of preferred stock underlying the depositary shares will
be convertible or exchangeable into any other class or series of
our capital stock.
If the series of the preferred stock underlying
the depositary shares is subject to redemption, the depositary
shares will be redeemed from the redemption proceeds, in whole
or in part, of the series of the preferred stock held by the
depositary. The redemption price per depositary share will bear
the same relationship to the redemption price per share of
preferred stock that the depositary share bears to the
underlying preferred stock. Whenever we redeem preferred stock
held by the depositary, the depositary will redeem, as of the
same redemption date, the number of depositary shares
representing the preferred stock redeemed. If less than all the
depositary shares are to be redeemed, the depositary shares to
be redeemed will be selected by lot or pro rata as determined by
the depositary.
Voting
Upon receipt of notice of any meeting at which
the holders of the preferred stock are entitled to vote, the
depositary will mail information about the meeting contained in
the notice to the record holders of the depositary shares
relating to the preferred stock. Each record holder of the
depositary shares on the record date (which will be the same
date as the record date for the preferred stock) will be
entitled to instruct the depositary as to how the preferred
stock underlying the holders depositary shares should be
voted.
The depositary will try, if practical, to vote
the preferred stock underlying the depositary shares according
to the instructions received. We will agree to take all action
requested by and deemed necessary by the depositary in order to
enable the depositary to vote the preferred stock in that
manner. The depositary will not vote any preferred stock for
which it does not receive specific instructions from the holders
of the depositary shares relating to the preferred stock.
Amendment and Termination of the Deposit
Agreement
We may amend the form of depositary receipt
evidencing the depositary shares and any provision of the
deposit agreement by agreement with the depositary at any time.
Any amendment that materially and adversely alters the rights of
the existing holders of depositary shares will not be effective,
however, unless approved by the record holders of at least a
majority of the depositary shares then outstanding. A deposit
agreement may be terminated by us or the depositary only if:
Charges of Depositary
We will pay all transfer and other taxes and
governmental charges arising solely from the existence of the
depositary arrangements. We will pay charges of the depositary
in connection with its duties under the deposit agreement.
Holders of depositary shares will pay transfer and other taxes
and governmental charges and any other charges that are stated
to be their responsibility in the deposit agreement.
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Miscellaneous
The depositary will forward to the holders of
depositary shares all reports and communications that we must
furnish to the holders of the preferred stock.
Neither we nor the depositary will be liable if
either of us is prevented or delayed by law or any circumstance
beyond our control in performing our respective obligations
under the deposit agreement. Our obligations and the
depositarys obligations under the deposit agreement will
be limited to performance in good faith of duties set forth in
the deposit agreement. Neither we nor the depositary will be
obligated to prosecute or defend any legal proceeding connected
with any depositary shares or preferred stock unless
satisfactory indemnity is furnished. We and the depositary may
rely upon written advice of counsel or accountants, or
information provided by persons presenting preferred stock for
deposit, holders of depositary shares or other persons believed
to be competent and on documents believed to be genuine.
Resignation and Removal of
Depositary
The depositary may resign at any time by
delivering notice to us. We may also remove the depositary at
any time. Resignations or removals will take effect upon the
appointment of a successor depositary and its acceptance of the
appointment. The successor depositary must be appointed within
60 days after delivery of the notice of resignation or
removal.
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all outstanding depositary shares relating to the
deposit agreement have been redeemed or converted into or
exchanged for other securities; or
there has been a final distribution on the
underlying preferred stock in connection with our liquidation,
dissolution or winding up and the distribution has been made to
the holders of the related depositary shares.
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DESCRIPTION OF WARRANTS
We may issue warrants for the purchase of debt
securities, preferred stock or common stock. Warrants may be
issued independently or together with debt securities, preferred
stock, or common stock offered by any prospectus supplement and
may be attached to or separate from any such securities. Each
series of warrants will be issued under a separate warrant
agreement to be entered into between us and a bank or trust
company, as warrant agent, all as set forth in the prospectus
supplement relating to the particular issue of warrants. The
following summaries of certain provisions of the warrants does
not purport to be complete and you should refer to the form of
warrant agreement that will be filed with the SEC in connection
with any particular offering of warrants.
Debt Warrants
The prospectus supplement relating to a
particular issue of debt warrants will describe the terms of
such debt warrants, including some or all of the following:
Stock Warrants
The prospectus supplement relating to any
particular issue of preferred stock warrants or common stock
warrants will describe the terms of such warrants, including
some or all of the following:
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the title of such debt warrants;
the offering price for such debt warrants, if any;
the aggregate number of such debt warrants;
the designation and terms of the debt securities
purchasable upon exercise of such debt warrants;
if applicable, the designation and terms of the
debt securities with which such debt warrants are issued and the
number of such debt warrants issued with each such debt security;
if applicable, the date from and after which such
debt warrants and any debt securities issued therewith will be
separately transferable;
the principal amount of debt securities
purchasable upon exercise of a debt warrant and the price at
which such principal amount of debt securities may be purchased
upon exercise (which price may be payable in cash, securities,
or other property);
the date on which the right to exercise such debt
warrants shall commence and the date on which such right shall
expire;
if applicable, the minimum or maximum amount of
such debt warrants that may be exercised at any one time;
whether the debt warrants represented by the debt
warrant certificates or debt securities that may be issued upon
exercise of the debt warrants will be issued in registered or
bearer form;
information with respect to book-entry
procedures, if any;
the currency or currency units in which the
offering price, if any, and the exercise price are payable;
if applicable, a discussion of material United
States federal income tax considerations;
the antidilution provisions of such debt
warrants, if any;
the redemption or call provisions, if any,
applicable to such debt warrants; and
any additional terms of such debt warrants,
including terms, procedures, and limitations relating to the
exchange and exercise of such debt warrants.
the title of such warrants;
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the offering price for such warrants, if any;
the aggregate number of such warrants;
the designation and terms of the common stock or
preferred stock purchasable upon exercise of such warrants;
if applicable, the designation and terms of the
offered securities with which such warrants are issued and the
number of such warrants issued with each such offered security;
if applicable, the date from and after which such
warrants and any offered securities issued therewith will be
separately transferable;
the number of shares of common stock or preferred
stock purchasable upon exercise of a warrant and the price at
which such shares may be purchased upon exercise;
the date on which the right to exercise such
warrants shall commence and the date on which such right shall
expire;
if applicable, the minimum or maximum amount of
such warrants that may be exercised at any one time;
if applicable, a discussion of material United
States federal income tax considerations;
the anti-dilution provisions of such warrants, if
any;
the redemption or call provisions, if any,
applicable to such warrants; and
any additional terms of such warrants, including
terms, procedures and limitations relating to the exchange and
exercise of such warrants.
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DESCRIPTION OF PURCHASE CONTRACTS AND
UNITS
The following is a general description of the
terms of the purchase contracts and units we may issue from time
to time. The specific terms of any purchase contracts or units
that we may offer will be described in a prospectus supplement.
We may issue purchase contracts, including
contracts obligating holders to purchase from us, and obligating
us to sell to the holders, a specified number of shares of
common stock, preferred stock or other securities at a future
date or dates. We may fix the price and number of securities
subject to the purchase contracts at the time we issue the
purchase contracts or we may provide that the price and number
of securities will be determined pursuant to a formula set forth
in the purchase contracts. The purchase contracts may be issued
separately or as part of units.
Units may consist of any combination of the
following: purchase contract, warrants, debt securities,
preferred stock and common stock issued by us and debt
securities or debt obligations of third parties, including
United States Treasury securities. Any of these securities,
other than the purchase contracts, may be included as part of
the unit to secure the obligations of the holders of the units
to purchase the securities under the purchase contracts. The
purchase contracts may require holders to secure their
obligations under the purchase contracts in a specified manner.
The purchase contracts also may require us to make periodic
payments to the holders of the units, or vice versa, and those
payments may be unsecured or prefunded on some basis.
The applicable prospectus supplement will
describe the terms of the purchase contracts or units offered by
that prospectus supplement. The description in the prospectus
supplement will not necessarily be complete, and reference will
be made to the purchase contracts, or the unit agreement, and,
if applicable, collateral or depositary arrangements relating to
the purchase contracts or units, which will be filed with the
SEC each time we issue purchase contracts or units. Material
United States federal income tax considerations applicable to
the units and the purchase contracts will also be discussed in
the applicable prospectus supplement. If we issue any purchase
contracts or units, we will file or incorporate by reference the
form of purchase contract and unit agreement as exhibits to the
registration statement and you should read these documents for
provisions that may be important to you. You can obtain copies
of any form of purchase contract and unit agreement by following
the directions described under the caption Where You Can
Find More Information.
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PLAN OF DISTRIBUTION
We may sell the Securities:
We may distribute the Securities:
We will describe the method of distribution of
the Securities in the applicable prospectus supplement.
We may determine the price or other terms of the
Securities offered under this prospectus by use of an electronic
auction. We will describe how any auction will determine the
price or any other terms, how potential investors may
participate in the auction and the nature of the obligations of
the underwriter, dealer or agent in the applicable Prospectus
Supplement.
Underwriters, dealers or agents may receive
compensation in the form of discounts, concessions or
commissions from us or our purchasers (as their agents in
connection with the sale of the common stock). These
underwriters, dealers or agents may be considered to be
underwriters under the Securities Act of 1933, as amended. As a
result, discounts, commissions, or profits on resale received by
the underwriters, dealers or agents may be treated as
underwriting discounts and commissions. Each prospectus
supplement will identify any such underwriter, dealer or agent,
and describe any compensation received by them from us. Any
initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time
to time.
Underwriters, dealers and agents may be entitled,
under agreements entered into with us, to indemnification by us
against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended, or to contribution with
respect to payments made by the underwriters, dealers or agents,
under agreements between us and the underwriters, dealers and
agents.
We may grant underwriters who participate in the
distribution of the Securities an option to purchase additional
Securities to cover over-allotments, if any, in connection with
the distribution. Underwriters or agents and their associates
may be customers of, engage in transactions with, or perform
services for us, in the ordinary course of business.
In connection with the offering of the
Securities, certain underwriters and selling group members and
their respective affiliates, may engage in transactions that
stabilize, maintain or otherwise affect the market price of the
Securities. These transactions may include stabilization
transactions effected in accordance with Rule 104 of
Regulation M promulgated by the SEC pursuant to which these
persons may bid for or purchase Securities for the purpose of
stabilizing their market price.
The underwriters in an offering of the Securities
may also create a short position for their account
by selling more Securities in connection with the offering than
they are committed to purchase from us. In that case, the
underwriters could cover all or a portion of the short position
by either purchasing Securities in the open market following
completion of the offering of these Securities or by exercising
any over-allotment option granted to them by us. In addition,
any managing underwriter may impose penalty bids
under contractual arrangements with other underwriters, which
means that they can reclaim from an underwriter (or any selling
group member participating in the offering) for the account of
the other underwriters, the selling concession for the
Securities that are distributed in the offering but subsequently
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Our common stock is listed on the NASDAQ under
the symbol FFIV. Any shares of common stock sold
pursuant to a Prospectus Supplement will be listed on the
NASDAQ, subject to official notice of issuance.
LEGAL MATTERS
Heller Ehrman White & McAuliffe LLP, Seattle,
Washington, will pass on the validity of the Securities offered
hereby.
EXPERTS
The financial statements incorporated in this
prospectus by reference to the Annual Report on Form 10-K
of F5 Networks, Inc. for the year ended September 30, 2002
have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of uRoam,
Inc. and subsidiaries (formerly Filanet Corporation)
incorporated into this prospectus and in the Registration
Statement by reference to the Current Report on Form 8-K/A
dated September 15, 2003 have been audited by BDO Seidman,
LLP, independent certified public accountants, to the extent and
for the period set forth in their report (which contains an
explanatory paragraph regarding the Companys ability to
continue as a going concern) incorporated by reference elsewhere
herein and in the Registration Statement, and are included in
reliance upon such report given upon the authority of said firm
as experts in auditing and accounting.
The financial statements of uRoam Acquisition
Corporation. (formerly uRoam, Inc.) incorporated into this
prospectus and in the Registration Statement by reference to the
Current Report on Form 8-K/A dated September 15, 2003
have been audited by BDO Seidman, LLP, independent certified
public accountants, to the extent and for the period set forth
in their report (which contains an explanatory paragraph
regarding the fact that the Company was acquired on
October 1, 2002) incorporated by reference elsewhere herein
and in the Registration Statement, and are included in reliance
upon such report given upon the authority of said firm as
experts in auditing and accounting.
INCORPORATION BY REFERENCE
The SEC allows us to incorporate by
reference the information we file with it, which means
that we can disclose important information to you by referring
you to another document that we filed with the SEC. The
information incorporated by reference is an important part of
this prospectus, and information that we file later with the SEC
will automatically update and supersede this information. We
incorporate by reference the documents listed below and any
future filings we make with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act, until we sell all of the
securities:
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You may obtain a copy of these filings at no
cost, by writing or telephoning us at 401 Elliott Avenue
West, Seattle, Washington 98119; telephone (206) 272-5555.
You should rely only on the information contained
or incorporated by reference in this prospectus, any
supplemental prospectus or any pricing supplement. We have not
authorized anyone to provide you with any other information. We
are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the
information in this prospectus, any accompanying prospectus
supplement or any document incorporated by reference is accurate
as of any date other than the date on the front of the document.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on
Form S-3 with the SEC. This prospectus does not include all
of the information contained in the registration statement. You
should refer to the registration statement and its exhibits for
additional information. Whenever we make reference in this
prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you
should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other
document. We are also required to file annual, quarterly and
current reports, proxy statements and other information with the
SEC.
You can read our SEC filings, including the
registration statement, over the Internet at the SECs web
site at www.sec.gov. You may also read and copy any document we
file with the SEC at its public reference facilities at
450 Fifth Street, N.W., Washington, D.C. 20549. You
may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference facilities. You may also
obtain copies of these reports directly from us by sending a
written request to us at our principal offices located at
401 Elliott Avenue West, Seattle, Washington 98119;
telephone (206) 272-5555.
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4,500,000 Shares
Common Stock
PROSPECTUS SUPPLEMENT
November 11, 2003
Citigroup
through one or more underwriters or dealers,
directly to purchasers, through agents, or
through a combination of any of these methods of
sale.
from time to time in one or more transactions at
a fixed price or prices, which may be changed from time to time,
at market prices prevailing at the times of sale,
at prices related to such prevailing market
prices, or
at negotiated prices.
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Our Annual Report on Form 10-K for the
fiscal year ended September 30, 2002.
Our Quarterly Reports on Form 10-Q for the
periods ended December 31, 2002, March 31, 2003 and
June 30, 2003.
Current Report on Form 8-K filed on
July 23, 2003, as amended by Form 8-K/ A filed on
September 15, 2003; and
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The description of our common stock contained in
our Registration Statement on Form 8-A filed on
May 11, 1999.
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